Face

Years to Maturity
Spot/zero rates

Discount function

###
Price
Yield (YTM)

###
Price
Yield (YTM)

###
Price
Yield (YTM)

4% coupon
Par yield coupon
15% coupon
 ###

rs to Maturity 1.0 2.0 3.0 4.0

4%
3.00% 5.00% 7.00% 9.00% coupon

ount function 0.971 0.907 0.816 0.708 15%

coupon
1.0 2.0 3.0 4.0 10.00%
$4.00 $4.00 $4.00 ###
### $3.88 $3.63 $3.27 $73.68 9.00%
8.78% $3.68 $3.38 $3.11 $74.29

1.0 2.0 3.0 4.0 8.00%

$8.57 $8.57 $8.57 ###
### $8.32 $7.77 $6.99 $76.91 7.00%
8.57%
6.00%
1.0 2.0 3.0 4.0
$15.00 $15.00 $15.00 ###
### $14.56 $13.61 $12.24 $81.47
5.00%
8.34%
1.0 2.0 3.0 4.0

8.78% 8.78% 8.78% 8.78%

Par yield coupon 8.57% 8.57% 8.57% 8.57%
8.34% 8.34% 8.34% 8.34%
4%
coupon
15%
coupon

2.0 3.0 4.0

 Hull Q04.08. When the zero curve is upward-sloping, the zero rate for a particu
When the zero curve is downward-sloping the reverse is true.

Par ###
Coupon 6.00%
Yield to maturity (YTM) 6.88% 7.00%
6.80%
Years to Maturity 0.5 1.0 1.5 2.0 6.60%
Cash flows $3.0 $3.0 $3.0 $103.0
6.40%
Spot (Zero) rates (conti 5.00% 5.80% 6.40% 6.80%
6.20%
Spot (Zero) rates (m=2) 5.06% 5.88% 6.50% 6.92%
6.00%
5.80%
Continuous Compounding (Hull)
5.60%
Discount function 0.975 0.944 0.908 0.873
5.40%
Six-month forward rate 5.000% 6.600% 7.600% 8.000%
5.20%
5.00%
Discounted (spot) $2.93 $2.83 $2.73 $89.90 $98.39
0.5
Discounted (function) $2.93 $2.83 $2.73 $89.90 $98.39
Discounted (forward) $2.93 $2.83 $2.73 $89.90 $98.39

Par Yield
Annuity 0.975 1.919 2.827 3.700 7.50%
Par Yield (m=2) 5.06% 5.87% ### 6.87%
Par Yield (Continuous) 5.00% 5.79% 6.37% 6.76% 7.00%
###
Confirming Par Yield 6.50%
Coupon @ 2-year maturity 6.87% 6.87% 6.87% 6.87%
Cash Flows $3.44 $3.44 $3.44 ### 6.00%
PV (Cash flows) $3.35 $3.24 $3.12 $90.28 $100.00
5.50%

5.00%
0.5
g, the zero rate for a particular maturity is greater than the par yield for that maturity.

Zero vs. Par (continous)

7.00%
6.80%
6.60%
6.40%
6.20%
6.00% Ze
ro
5.80%
5.60%
5.40%
5.20%
5.00%
0.5 1.0 1.5 2.0

Zero vs. Par (m=2)

7.50%

7.00%

6.50%
Ze
ro
6.00%

5.50%

5.00%
0.5 1.0 1.5 2.0
hat maturity.