Just struggling with putting the two together and google seems to be failing me.
(1) Are the yields on yield curves annual continuously compounded rates, effective rates or something else like a "bond yield" type of calculation. What I mean by this last one, is, for example, if a current bonds were priced $100 (same as face value) and paid $5 each year then the yield would be $5 but it doesn't seem that this 5% is a guaranteed "effective rate" since the first coupon of $5 in a years time may not be able to be reinvested at a "5%" rate...
(2) Assuming the yield curves yield rates are effective rates, for example, for a yield curve with points (1,4%) and (2,5%) where its (x,y)=(maturity,yield) does this suggest that, one could currently invest in a zero coupon bond and receive a 4% return at the end of the year, and that one could also invest in a 2 year zero coupon bond and receive (1.05)^2-1= 10.25% 2-year-return at the end of the two years. Is this one way of thinking about it?
You can skip what's below (a bit of musing) but I would really appreciate some clarification, hopefully along these simplistic lines, to the above.
Things seem to get complicated for me when I try think of non-zero coupon bonds because, for example, for two years, if a coupon bond was priced $1000 now and payed $51.25 at the end of each year, wouldn't this technically also be a 10.25% for the two years, except that the first coupon could be reinvested at a risk free rate making it more attractive then a zero coupon bond paying 10.25% at the end of two years.