Abstract
This chapter describes the cash flows and market conventions of standard U.S. Treasury securities and shows how to calculate implied zero-coupon bond prices when zeros are not actually traded. Some individuals currently might be willing to pay more or less than others depending on their need for cash, compared to their expected need for cash at the future date. The answer then may seem to be subjective and arbitrary depending on the individual. Firstly, a competitive market requires no transaction costs such as commission charges, brokerage fees, or bid-ask spreads. This follows simply from the fact that one can buy or sell at one price. Secondly, a competitive market assumes some unspecified, but effective enforcement mechanism for promised payments. The key to valuing payments at different future dates is to view dollars promised at different future dates as separate commodities. The three forms of interest rate that are most commonly used are discount rates, simple interest rates, and compounded rates. Continuously compounded rates are often used for analytical purposes.
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