Understanding Spot Rates: What’s True and What’s Not?

Let's examine each statement to determine its accuracy regarding spot rates: 1. **The interest rates on the yield curves are often called spot rates.** - **True**. Spot rates are essentially the interest rates applied to zero-coupon bonds (bonds that pay no interim interest and only pay back the principal at maturity) for various maturities. These rates can be plotted as a yield curve where each point is a spot rate for different maturities. 2. **The spot rates do not ignore the term structure of interest rates.** - **True**. Spot rates are derived from the term structure of interest rates, which represents the relationship between interest rates (or bond yields) and different maturities. Therefore, spot rates take the term structure into account. 3. **The n-year spot rate can be computed in terms of n one-year forward rates.** - **True**. The n-year spot rate can be mathematically computed using n one-year forward rates. Spot rates are the geometric average of forward rates. This means the spot rate for a particular term is related to the series of forward rates over that period. So, all the statements provided are true.