Very logical ytm/spot rate question investing, something, understand, buying

jlg1982

If I understand correctly YTM (or as a matter of fact also spot rate) is a rate that sets the present value of cash flows equal to price of security. Correct?

So here is my question:
As an investor why would I invest in something that has NPV=0? I do not realize any gains/losses investing in it. In other words, if I pay 94 today and receive 100 a year from now, the 100 a year from now has only a 94$ buying power.

Is my understanding of YTM/spot rates correct. I am afraid I may not have understood YMT/spot rates correctly.

spartanag07

I am not sure, if I fully understand. Can someone please elaborate? Thanks!

dece2011

explains!. Thanks.

homie

hi vpatel
this is another way of looking at how much u want to make. here is an example

let us say u want to make 6% return on your investment. and you know the future cash flows. for 1 year let us say it is 100. so based on this value of 100 at 6% discount rate your pv would equal let us say around 95 (dont have the calculator next to me - so let us pretend that 100/1.06 = 95).

now when the current security value is 95, you would say that your 95 $ are goiing to get you 100 dollars in the future after 1 yr. now if the security is below 95, you are havinga good day and you will definitely buy it as it is giving you more return than you expected. but your minimum return valueis 95 and if it is 95, you are happy to makethe 6% as you believe that this rate shoudl meet your future needs (which i believe is how you came up with this magical number of 6% in the first place - if not then you would have picked a different number andit would have got a different return value).

i know a lot of same words reiterating again and again just to make it easy for you :-)