Analyze_This

the basic yield curve does not account for securities that have varying coupon rates. When the yield to maturity was calculated, we assumed that the coupons were reinvested at an interest rate equal to the coupon rate, therefore, the bond was priced at par as though prevailing interest rates were equal to the bond's coupon rate.

The spot-rate curve addresses this assumption and accounts for the fact that many Treasuries offer varying coupons and would therefore not accurately represent similar noncallable fixed-income securities. The spot-rate curve is created by plotting the yields of zero-coupon Treasury bills and their corresponding maturities.