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A zero coupon swap (ZCS) [1] is a derivative contract made between two parties with terms defining two 'legs' upon which each party either makes or receives payments. One leg is the traditional fixed leg, whose cashflows are determined at the outset, usually defined by an agreed fixed rate of interest.
It is zero-coupon because there is only one cash flow at the maturity of the swap, without any intermediate coupon. It is called a swap because at maturity, one counterparty pays a fixed amount to the other in exchange for a floating amount (in this case linked to inflation). The final cash flow will therefore consist of the difference between ...
Given: 0.5-year spot rate, Z1 = 4%, and 1-year spot rate, Z2 = 4.3% (we can get these rates from T-Bills which are zero-coupon); and the par rate on a 1.5-year semi-annual coupon bond, R3 = 4.5%. We then use these rates to calculate the 1.5 year spot rate. We solve the 1.5 year spot rate, Z3, by the formula below:
Volatility and interest rate risk: Without regular interest payments to cushion price fluctuations, zero-coupon bonds are more volatile than short-term bonds. In general, the current value of any ...
An affine term structure model is a financial model that relates zero-coupon bond prices (i.e. the discount curve) to a spot rate model. It is particularly useful for deriving the yield curve – the process of determining spot rate model inputs from observable bond market data.
Since a loan by a borrower is an investment for the lender, both terms can apply to the same transaction, depending on the point of view. For a zero-coupon bond such as a US treasury bill, an annual effective discount rate may be specified instead of an effective interest rate, because zero coupon bonds trade at a discount from their face values.
Bonds are a favorite among income investors because of their low risk and the predictable cash flow they generate. But there's a unique class of bonds that don't provide passive income. They're ...
To extract the forward rate, we need the zero-coupon yield curve.. We are trying to find the future interest rate , for time period (,), and expressed in years, given the rate for time period (,) and rate for time period (,).