Zero-Coupon Interest Rates, Forward-Forward Rates, Counterparty Exposure for Derivatives and Contracts for Derivatives

Abstract

In the chapter on bond valuation, the yield to maturity (YTM) method was explained. The yield was that single rate which discounted all future cash-flows arising on a bond back to the current market value (net present value). The advantage of YTM is its simplicity. Its disadvantage is that it assumes all coupons are re-invested at the single rate. The zero-coupon curve attempts to overcome this disadvantage.