Spot rate
The yield on a single payment at one future date. Pricing each of a bond's cash flows at its own is the arbitrage-free answer.
Where you will meet it
Spot rate appears in 18 learning outcomes on the CFA syllabus. A few of them:
- Contrast the Z-spread with the option-adjusted spread
“The Z-spread is the constant amount added to every point on the benchmark spot curve that makes the present value of a bond's cash flows equal its price.”
- Explain cash flow additivity and apply it to derive an implied forward rate
“Applied to interest rates, investing for two years at the two-year spot rate must equal investing for one year and rolling over at the implied forward rate: (1 + S2)² = (1 + S1) x (1 + f).”
- Explain how the rate on an interest rate forward contract is fixed
“The fixed rate is set so that the contract has zero value at initiation, which means it must equal the implied forward rate from today's spot rates; any other rate would allow an arbitrage by borrowing for one period and lending for another.”
- Read and explain quotes for spot and forward exchange rates
“A forward rate is not a forecast — it is the spot rate adjusted for the interest rate differential, because otherwise borrowing in one currency and lending in the other would be free money.”
See also
Practise it
Practise spot rate until it is automatic: questions that explain every wrong option.
Take the free diagnostic →