Course · Act II: Hedge the Book · Chapter 7
Zero-coupon bonds and forward rates
Zero-coupon bonds and Treasury STRIPS, why a zero’s duration is its maturity, spot rates, and how forward rates turn the yield curve into a forecast of rate cuts or hikes.
Key terms
- Zero-coupon bond
- A bond that pays only its face value, at maturity. Bought below face; its duration equals its maturity.
- Spot rate
- The yield on a zero-coupon bond: the rate for money lent today and repaid on one date.
- Forward rate
- The rate for a future period implied by today’s spot rates. Below spot means the market expects cuts.
- STRIPS
- Treasury notes and bonds split into separate zero-coupon pieces: each coupon and the principal.
“Zeros and Forwards” is part of the full course: 7 puzzles on zero-coupon bonds and forward rates. Gullwing and Osprey are fictional banks; the Treasury yields and Fed rates are real. Try this act’s free chapter, “Who Sets the Short End”, first.
“Zeros and Forwards” is in Act II: Hedge the Book. 7 puzzles, unlimited retries.
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