[Verse 1] When you buy a zero coupon bond today And hold it till it comes due The yield you earn along the way That's the spot rate, pure and true No coupons paid, no reinvestment fear Just one payment at the end The spot rate makes the pricing clear On this you can depend [Chorus] Spot rates are pure, spot rates are clean Zero coupon yields, know what I mean Plot them on a curve from short to long Term structure singing its interest song S-P-O-T, one maturity Not like YTM with complexity [Verse 2] YTM assumes you reinvest Each coupon at the same rate But spot rates put this myth to rest They isolate each payment date Six month spot, one year spot too Each maturity stands alone Building blocks for me and you In the interest rate zone [Chorus] Spot rates are pure, spot rates are clean Zero coupon yields, know what I mean Plot them on a curve from short to long Term structure singing its interest song S-P-O-T, one maturity Not like YTM with complexity [Bridge] From the curve we can derive Forward rates for future years Bootstrap method keeps alive The term structure that appears Normal, inverted, or flat The curve tells us where rates are at [Verse 3] Each point upon the spot rate curve Shows the yield for that one term Risk-free rates that help us observe How time makes interest rates squirm Discount factors we can find Price any bond with ease in mind [Chorus] Spot rates are pure, spot rates are clean Zero coupon yields, know what I mean Plot them on a curve from short to long Term structure singing its interest song S-P-O-T, one maturity Building blocks for you and me [Outro] From short term to long term rates The spot curve never lies Term structure it demonstrates Pure yields before your eyes
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