[Verse 1] Picture a zero coupon bond, stripped clean of payments Just one final payoff when maturity's here The interest rate that makes its present value equal To market price today - that's spot rate, crystal clear YTM assumes you reinvest each coupon payment At the same return throughout the bond's whole life But spot rates tell a different, cleaner story No reinvestment risk, no compound strife [Chorus] Spot rates are pure, single payment yields Zero coupon equivalent, that's what it reveals Plot them on a graph, you'll see the curve unfold Term structure showing rates from short to long Spot rates sing their song [Verse 2] Six months, one year, two years, and beyond Each maturity gets its own specific rate The spot rate curve maps this constellation Time on the x-axis, rates communicate Normal curves slope upward to the right Longer terms demand a higher prize Inverted curves predict recession's shadow When short rates climb above where long rates rise [Chorus] Spot rates are pure, single payment yields Zero coupon equivalent, that's what it reveals Plot them on a graph, you'll see the curve unfold Term structure showing rates from short to long Spot rates sing their song [Bridge] Bootstrap from the shortest to the longest Strip away each coupon's interference Pure discount factors, time value's essence Spot curve shows the market's true preference [Chorus] Spot rates are pure, single payment yields Zero coupon equivalent, that's what it reveals Plot them on a graph, you'll see the curve unfold Term structure showing rates from short to long Spot rates sing their song [Outro] When you see the curve, you see the future Interest rate expectations laid so bare Spot rates tell the market's honest story Term structure secrets floating in the air
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