Investments, tenth edition

 eXcel APPLICATIONS:    Spot and Forward Yields 

  T

 he spreadsheet below (available at  

 www.mhhe.com/

bkm  ) can be used to estimate prices and yields of coupon 

bonds and to calculate the forward rates for both single-year 

and multiyear periods. Spot yields are derived for the yield 

curve of bonds that are selling at their par value, also referred 

to as the current coupon or “on-the-run” bond yield curve. 

 The spot rates for each maturity date are used to calcu-

late the present value of each period’s cash flow. The sum 

of these cash flows is the price of the bond. Given its price, 

the bond’s yield to maturity can then be computed. If you 

were to err and use the yield to maturity of the on-the-run 

bond to discount each of the bond’s coupon payments, you 

could find a significantly different price. That difference is 

calculated in the worksheet.