A fixed-income security promises cash flows at specified future dates. Its price depends on the term structure of interest rates and the relevant credit and liquidity risks.
A zero-coupon bond makes one payment at maturity and no earlier coupon payments. A unit-face-value bond maturing at has terminal value .
An interest rate measures the growth of value across time. In discrete time, a one-period investment at rate grows by the factor .
The time- one-period spot interest rate is the rate available for investment from to . For a unit-face-value zero-coupon bond,
(1)
In a discrete-time market, the bank account reinvests at each successive spot interest rate:
(1)

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