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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

A spot rate is best described as the:

A spot rate is the yield to maturity on a zero-coupon bond for a given maturity. It discounts a single cash flow received on that date. Yield to maturity on a coupon bond instead applies one rate to every cash flow, and a reinvestment rate is a different concept.

  1. Ayield to maturity on a zero-coupon bond maturing on a given dateCorrect
  2. Brate at which all coupons of a bond are assumed to be reinvested until maturity
  3. Csingle discount rate that equates a coupon bond's price with the present value of all its cash flows

Explanation

A spot rate is the yield on a zero-coupon bond for a specific maturity, so it discounts a single cash flow at that date. The third option describes yield to maturity, which applies one rate to all of a coupon bond's cash flows. The second option describes a reinvestment rate assumption, not a spot rate.

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