Evaluates the continuously compounded zero rate implied from the market price of a zero coupon bond.
public double ZeroRateFromZeroBondWithExplicitTime( doubletime2Maturity, doubleprincipleSum, doublemarketPrice );
Parameters
time2Maturity
The time in years expressed in decimal format (i.e. 6 months = 0.5) until the bond matures.
principleSum
The principle sum of the bond (also known as the face value).
marketPrice
The market price of the bond.
Return Value
The continuously compounded zero rate in decimal format (i.e. 0.01 = 1 percent).
Remarks
Recall that a zero coupon bind is a bond which does not pay any
coupons.
Remarks:
This procedure can be applied to the construction of the zero rate
curve (i.e. the zero rate against the maturity).
Risk arbitrage will ensure that a class of interest rate assets which exhibit is similar
risk profile will all have similar zero rate curves. Therefore, for classes of assets such a
US Treasury bonds (i.e. all have zero risk of default) will all have zero rate which lie on the
same zero curve.