1.   The spot yield curve is a plot of spot yields against term to maturity.

2.   The spot yield for a particular term to maturity is the same as the yield on a zero-coupon bond of the same maturity.

3.   The spot yields can be derived from the par yields as follows.

4.   Now that we have found the correct discount factors, it is easy to calculate the spot yields.

5.   Thus the spot yield curve is the correct method for pricing or valuing any cash flow because it uses the appropriate discount factors.

6.   The relationship between the par yields, spot yields and forward rates is given in the following table.

7.   The relationship between par yields and spot yields can be shown using the following example.

8.   The relationship between spot yields and forward rates is shown in.

9.   If the spot yield is the average return, then the forward rate can be interpreted as the marginal return.