Mastering Financial Calculations: A step-by-step guide to the mathematics of financial market instruments, Second edition

Chapter 7. Zero-coupon Rates and Yield Curves

“A zero-coupon yield is unambiguous: it is simply a measure of the relationship between a single future value and its present value.”

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Zero-coupon yields and par yields

Forward-forward yields

Summary

Longer-dated FRAs

Exercises

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Zero-Coupon Yields and Par Yields

Constructing par yields from zero-coupon yields

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 investors would not pay 100 for this; they would pay considerably less to allow for the fact that alternative investments would earn them interest. A zero-coupon yield is the yield earned on such an instrument, taking into ...