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

An analyst compares a 5-year par bond yield with the 5-year spot rate on an upward-sloping yield curve. The 5-year spot rate is most likely:

The 5-year spot rate is higher than the 5-year par rate on an upward-sloping curve. The par rate blends the lower short-maturity spot rates applied to the coupons with the 5-year spot rate applied to the final payment, so it falls below the longest spot rate.

  1. Aequal to the 5-year par rate
  2. Bhigher than the 5-year par rateCorrect
  3. Clower than the 5-year par rate

Explanation

A par rate is a weighted average of spot rates for the earlier cash flows, which are lower on an upward-sloping curve. So the final-maturity spot rate exceeds the par rate. Equality holds only for a flat curve, and a lower spot rate would occur on a downward-sloping curve.

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