2.23 Comparison of Single Discounted Rate (YTM) and Spot Curve
- You have noted above that the spot curve discounts each of the bond’s cash flows at a different rate.
- Alternatively, the bond’s YTM applies the same rate to each of the bond’s cash flows.
- In the end, using either method will provide the same PV.
Exercise: Using the data for the two-year bond on the prior page, calculate, on a period-by-period basis, the present value of the cash flows and hence the bond’s price, using alternately, the single Y-T-M discount rate, and the spot rates. Use the template provided below.
| Period | CF | YTM | PV-CF | Spot Rates | Spot Discount Rates | PV-CF |
| 1 | 4.50 | |||||
| 2 | 4.50 | |||||
| 3 | 4.50 | |||||
| 4 | 104.50 | |||||
| 118.00 |