Zero-coupon Yield, the Spot Yield Curve and Bootstrapping
A zero-coupon yield is the actual or theoretical yield earned on an instrument where there are no cashflows other than at the start and at maturity.
The spot yield curve shows zero-coupon yields against time to maturity.
Bootstrapping is a process of building up a theoretical spot yield curve by calculating zero-coupon yields for successively longer maturities from those for shorter maturities.
How are they used?
A zero-coupon instrument is one which pays no coupon. For example, a company might issue a 5-year bond with a face value of 100 but no coupon. Clearly an investor would not pay 100 for this; he would pay considerably less to allow for the fact that ...