Hi all,
i have a qn on fixed income. Which of the following 1 year bonds most likely has a YTM that can be interpreted as a spot rate?
Price=96.15% of par, YTM= 6.38% ( Correct answer)
Price=100% of par, YTM= 5.19%
Price= 103.85% of par, YTM =4.72%
Could someone explain to me the reasoning behind it?
Thank you!
A spot rate is based on securities that don’t pay coupons, so all of your return is realized at the end of the term.
You cannot have a YTM simillar to a spot rate with a price equal to, or above par.
Spot rate is derived from zero-coupon bonds or strip Treasuries. If they don’t have a coupon payment then the vlaue of the bond is the adjusted return of the principal or a T-bill which the yield is discounted in the price of the bond.
When there is YTM without a discount to the price vs par, it implies there is a coupon component.