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CFA Level I · CFA Level I Exam · The Term Structure of Interest Rates: Spot, Par, and Forward Curves

A analyst observes a parallel upward shift in a par curve of 50 bps, followed by a period in which short-term rates rise by 100 bps while long-term rates rise by 20 bps. The second movement is best described as a:

The second movement is a flattening of the curve. Short-term rates rose by 100 bps and long-term rates by only 20 bps, so the long-minus-short spread narrowed. A parallel shift would require equal changes across maturities.

  1. Asteepening of the yield curve
  2. Bparallel shift of the yield curve
  3. Cflattening of the yield curveCorrect

Explanation

Short rates rose by more than long rates, so the spread between long and short maturities narrowed. That is a flattening, not a parallel shift, and not a steepening.

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