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What is the motivation behind the use of ZCYC for valuation of fixed income instruments?

April 26, 2017fixed income instruments motivation valuation zcyc

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What is the motivation behind the use of ZCYC for valuation of fixed income instruments?

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Modeled as a series of cashflows due at different points of time in the future, the underlying price of a fixed income instrument can be calculated as the net present value of the stream of cashflows. Each cashflow, in such a formulation (presented below), has to be discounted using the interest rate for the associated term to maturity [the appropriate discount factor being given by 1/(1+r(i))m(i), where m(i) is the time to maturity for the ith cashflow and r(i) the associated spot interest rate]. The appropriate spot rates to be used for this purpose are provided by the ZCYC. Note: In the formulation above, C denotes coupon and R the redemption amount, m is the time to maturity.