Appendix 1: Pricing Interest Rate Securities

Abstract

Interest rate securities come in two broad forms, known as discount securities and bonds. The difference between the two is that bonds pay coupons periodically, whereas discount securities pay interest in one payment at maturity. Interest rate securities are nearly always quoted in terms of an interest rate, sometimes referred to as the yield to maturity. The yield to maturity of a discount security is often quoted as 100 minus the interest rate, so a 5% yield is quoted as 95.00.