Financial theory tells us that the theoretical value of a Treasury security should be equal to the present value of the cash flow where each cash flow is discounted at the appropriate theoretical spot rate.

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This is a fundamental concept in financial theory known as the "law of one price" which states that identical securities should sell for the same price. Therefore, the theoretical value of a Treasury security should be equal to the sum of the present values of its cash flows, each discounted at the appropriate theoretical spot rate.

Financial Theory Tells Us That the Theoretical Value of a Treasury