CFA Level I · CFA Level I Exam · The Term Structure of Interest Rates: Spot, Par, and Forward Curves
A par curve is constructed from yields on bonds that are priced at par. Which statement best describes the par rate for a given maturity?
The par rate is the coupon rate at which a bond of a given maturity is priced at 100% of face value. It differs from the spot rate, which is a zero-coupon yield, and from the forward rate, which applies to a loan starting in the future.
- AThe coupon rate at which a bond of that maturity prices at 100% of face valueCorrect
- BThe yield on a zero-coupon bond of that maturity
- CThe rate agreed today for a loan starting at a future date
Explanation
The par rate is the coupon rate that makes a coupon bond's present value equal to its face value, so the bond trades at par. A zero-coupon yield is a spot rate, and a rate for a future loan is a forward rate.
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