Relation between spot and discount rates
Suppose the spot rates for 1 and 2 years are s_1 = 6.3\%s
1
=6.3% and s_2 = 6.9\%s
2
=6.9% with annual compounding. Recall that in this course interest rates are always quoted on an annual basis unless otherwise specified. What is the discount rate d(0,2)d(0,2)?
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The spot rate is calculated by finding the discount rate that makes the present value (PV) of a zero-coupon bond equal to its price. ... Essentially, this means that spot rates use a more dynamic and potentially more accurate discount factor in a bond's present valuation.
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