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Can anyone please explain to me how spot rates are not equal to the annual coupon payments of a bond?
Say a bond is paying 8% coupons annually, how is it that the spot rate is then say 6%?
As the spot rate is supposed to be the current value of a single payment at one time in the future, so why isnt it the same as the promised coupon rate say a year from now if the coupon is paying annually?
I feel like I am fundamentally not understanding something here.
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Up0
These are present values of future payments, discounted at market interest rates. They reflect the current market’s assessment of the risk and future value of receiving that payment. In your example, if the spot rate is 6%, it means the market believes an 8% payment a year from now is only worth 6% today.
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