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

An analyst moves from a bond's yield to maturity to a set of spot rates to value the same bond. The spot rate approach is most likely better because it:

The spot rate approach is better because it discounts each cash flow at the spot rate matching its own maturity, reflecting the shape of the term structure, whereas yield to maturity applies one single rate to all cash flows.

  1. Adiscounts each cash flow at a rate matching its maturityCorrect
  2. Buses one rate for every cash flow
  3. Cignores reinvestment of coupons

Explanation

Spot rates discount each cash flow at the rate for its own timing, so they reflect the term structure. Yield to maturity applies a single rate to all flows, which is the opposite of option B. Neither method ignores reinvestment in the way option C claims.

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