Zero coupon yield

The rate of return on an investment today, for a single cashflow at maturity of the instrument.

Equal to the current market rate of return on zero coupon bonds of the same maturity.

Example

The zero coupon yield for the maturity 0-3 periods is 2% per period.

This means that a deposit of £1,000,000 at Time 0 periods on these terms would return:

£1,000,000 x 1.02³

= £1,061,208 at Time 3 periods.

(No intermediate interest is payable.)

An application of zero coupon yields is the pricing of zero coupon bonds.

The zero coupon yield is also known as the Zero coupon rate, spot rate, or spot yield.

See also