Spot Rate Treasury Curve

What is the 'Spot Rate Treasury Curve'

The spot rate treasury curve is a yield curve constructed using Treasury spot rates rather than yields. The spot rate Treasury curve can be used as a benchmark for pricing bonds. This type of rate curve can be built from on-the-run treasuries, off-the-run treasuries or a combination of both. Alternatively, the Treasury curve can be calculated by using Treasury coupon strips.

BREAKING DOWN 'Spot Rate Treasury Curve'

Because many bonds typically have multiple cash flows (coupon payments) at different points in the bonds' lives, it is not theoretically correct to use just one interest rate to discount all of the cash flow. Therefore, in order to make a sound bond valuation, it is good practice to match up and discount each coupon payment with the corresponding Treasury spot rate for pricing the present value of each price.

For example, suppose that a corporate two-year 10% coupon bond is being priced using Treasury spot rates. The Treasury spot rates for the subsequent four periods (each year is composed of two periods) are 8%, 8.05%, 8.1% and 8.12%, and the four corresponding cash flows are $5, $5, $5, $105. The present value for each respective cash flow will be $4.81, $4.62, $4.44 and $89.50. Therefore, the sum of all the cash flows will be $103.36.

However, $103.36 is not necessarily the price at which the corporate bond will ultimately be sold. Because the spot rates used to price bonds reflect rates that are from default-free Treasuries, the corporate bond's price will need to be further discounted to account for its increased risk compared to Treasury bonds.

RELATED TERMS
  1. Off-The-Run Treasury Yield Curve

    The U.S. Treasury yield curve derived using off-the-run treasuries. ...
  2. On-The-Run Treasury Yield Curve

    The U.S. Treasury yield curve derived using on-the-run treasuries. ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with ...
  4. Off-The-Run Treasuries

    All Treasury bonds and notes issued before the most recently ...
  5. Curve Steepener Trade

    A strategy that uses derivatives to benefit from escalating yield ...
  6. On-The-Run Treasuries

    The most recently issued U.S. Treasury bond or note of a particular ...
Related Articles
  1. Managing Wealth

    How Bond Market Pricing Works

    Learn the basic rules that govern how bond prices are determined.
  2. Markets

    Understanding The Treasury Yield Curve Rates

    Treasury yield curves are a leading indicator for the future state of the economy and interest rates.
  3. Managing Wealth

    Interest Rates And Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  4. ETFs & Mutual Funds

    Top 4 Treasurys ETFs (SHY, IEI)

    Learn about the specifics of the top four U.S. Treasury ETFs and how investors can buy ETFs that invest in bonds along the yield curve.
  5. Markets

    Understanding Treasury Yield

    Treasury yield refers to the return on an investment in a U.S. government debt obligation, such as a bill, note or bond.
  6. Investing

    Trade Bond ETFs Using Yield Curves

    Different types of yield curves provide important insights for trading bond-based securities.
  7. Managing Wealth

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  8. Managing Wealth

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
  9. Investing

    What is Treasury Stock?

    Treasury stock is a company’s own stock that it holds in its treasury for later use.
  10. Markets

    Why the 10-Year US Treasury Rates Are Crucial

    10-year treasury bond yields are important indicators of the economy as a whole.
RELATED FAQS
  1. What is the difference between the Daily Treasury Long-Term Rates and the Daily Treasury ...

    Find out more about the daily Treasury long-term rates, daily Treasury yield curve rates and the difference between these ... Read Answer >>
  2. Will speculators buy or sell Treasury bond futures contracts if they expect interest ...

  3. Why are treasury bond yields important to investors of other securities?

    Learn about the wide-ranging impact of U.S. Treasury Bond yields on all other interest-bearing instruments in the economy ... Read Answer >>
  4. Where on the Internet can I find yield curves over various periods?

    Find out where to locate reliable yield curve information on the Internet, including the U.S. Department of the Treasury ... Read Answer >>
  5. Which economic factors impact treasury yields?

    Discover the economic factors that impact Treasury yields. Treasury yields are the benchmark yield for the rest of the world, ... Read Answer >>
  6. What is meant by off-the-run treasuries?

    Understand what is meant by off-the-run Treasuries, along with the key differences in yield that commonly occur between on- ... Read Answer >>
Hot Definitions
  1. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  2. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  3. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  4. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  5. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  6. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
Trading Center