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 ontherun treasuries, offtherun treasuries, or a combination of both. Alternatively, the Treasury curve can be calculated by using Treasury coupon strips.
BREAKING DOWN 'Spot Rate Treasury Curve'
To reflect market expectations of changing interest rates, bonds may be priced based on Treasury spot rates rather than Treasury yields. When spot rates are derived and plotted on a graph, the resulting curve is the spot rate Treasury curve. Spot rates are prices quoted for immediate bond settlements, so pricing based on spot rates takes into account anticipated changes to market conditions. Theoretically, the spot rate or yield for a particular term for maturity is the same as the yield on a zerocoupon bond with the same maturity.
The spot rate Treasury curve provides the yield to maturity (YTM) for zerocoupon bonds that is used to discount a single cash flow at maturity. Thus, to determine the price of a couponpaying bond, the YTM is used to discount the first coupon payment at the spot rate for its maturity, and the second coupon payment at the spot rate for its maturity, and so on. Because many bonds typically have multiple cash flows (coupon payments) at different points during the duration of the bond, 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 cash flow.
For example, suppose that a twoyear 10% coupon bond with par value of $100 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 (calculated as 10%/2 x $100), $5, $5, $105 (coupon payment plus principal value at maturity). When the spot rates are plotted against the maturities, we get the spot rate or the zero curve.
Using the bootstrap method, the number of periods will be designated as 0.5, 1, 1.5, and 2, where 0.5 is the first 6month period, 1 is the cumulative second 6month period, and so on.
The present value for each respective cash flow will be:
= $5/1.08^{0.5 }+ $5/1.0805^{1} + $5/1.081^{1.5 }+ $105/$1.0812^{2}
Â = $4.81 + $4.63 + $4.45 + $89.82
= $103.71
Theoretically, the bond should be offered at a price of $103.71 in the markets. However, this is not necessarily the price at which the bond will ultimately be sold. Because the spot rates used to price bonds reflect rates that are from defaultfree Treasuries, the corporate bond's price will need to be further discounted to account for its increased risk compared to Treasury bonds.
It is important to note that the spot rate Treasury curve is not an accurate indicator of average market yields because most bonds are not zerocoupon.

Treasury Bond  TBond
A treasury bond is a marketable, fixedinterest U.S. government ... 
Treasury Note
A treasury note is a marketable U.S. government debt security ... 
OnTheRun Treasury Yield Curve
The ontherun Treasury yield curve is derived from ontherun ... 
Treasury Yield
Treasury yield is the return on investment, expressed as a percentage, ... 
Term Structure Of Interest Rates
The term structure of interest rates is the relationship between ... 
Note Against Bond Spread (NOB)
A note against bond spread (NOB) is the spread of offsetting ...

Insights
Understanding The Treasury Yield Curve Rates
Treasury yield curves are a leading indicator for the future state of the economy and interest rates. 
Investing
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. 
Investing
The Importance Of U.S. Treasury Rates
U.S. Treasury bond interest rates affect more than just bondholders! It impacts the day to day lives of all consumers. 
Investing
Bond yield curve holds predictive powers
This measure can shed light on future economic activity, inflation levels and interest rates. 
Investing
Understanding Bond Prices and Yields
Understanding this relationship can help an investor in any market. 
Investing
How Rising Interest Rates and Inflation Affect Bonds
Understand bonds better with these four basic factors. 
Investing
Comparing Yield To Maturity And The Coupon Rate
Investors base investing decisions and strategies on yield to maturity more so than coupon rates. 
Investing
Introduction to Treasury Securities
Purchasing Treasury securities backed by the U.S. government and knowing their characteristics can provide a steady guaranteed income and peace of mind.

On what basis does the sustainable growth rate fluctuate?
Learn about the differences between the calculations for the yield to maturity and spot rate for determining the present ... Read Answer >> 
What is the difference between yield to maturity and the spot rate?
Find out how yield to maturity and spot rate calculations use different discount rates to determine the present market value ... Read Answer >> 
How do I convert a spot rate to a forward rate?
The spot rate shows the cost of executing a financial transaction today, while the forward rate provides the cost of executing ... Read Answer >>