Spot Rate

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In fixed income, a spot rate is the interest rate, or yield, for a single payment made at a specific date in the future, starting today, as implied by a zero-coupon bond of that maturity.

A bond paying several coupons is really a bundle of separate payments at different dates. Each payment can be discounted at its own spot rate, the rate for money borrowed from today until that payment date.

Spot rates for different maturities form the spot rate curve, also called the zero-coupon yield curve. Analysts derive it from the prices of zero-coupon bonds or by working backwards from coupon bond prices, a process called bootstrapping.

For example, if the one-year spot rate is 4% and the two-year spot rate is 5%, a payment of 100 due in two years is worth 100 divided by 1.05 squared, or about 90.70, today.

Spot rates are used to value bonds and other cash flows accurately, and to derive forward rates. In foreign exchange and commodity markets, the term spot rate has a different meaning: the price for immediate delivery, as opposed to a forward price agreed today for delivery later.

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