Question: A zero rate (or spot rate) for maturity T is the rate of interest earned on an investment that provides a payoff only at time

A zero rate (or spot rate) for maturity T is the rate of interest earned on an investment that provides a payoff only at time T. Example (Table 4.2) Maturity (years) Zero rate (cont. comp.) 05 5.00% 10 5.80% 15 6.40% 20 6.80% Zero rates are used to calculate the cash price of a bond. In your previous subjects, you have used bond pricing formulas and have discounted the expected cashflows (coupons and face value) by a constant discount rate. Note that when you use zero rates, you discount the bond cashflows by rates corresponding to the required maturities. For example, the theoretical price of a two-year bond providing a 6% coupon semiannually is 3e0,0>x0,> + 3e0.0>8x1.0 + 3e0.064> + 10377098720 = 9839

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