Skip to content

FRM Part I · FRM Exam Part I · Pricing Conventions, Discounting, and Arbitrage

Discount factors are 0.9700 for 1 year and 0.9300 for 2 years. What is the 2-year par yield for an annual-pay bond?

The par yield is 3.68%. A par bond has price 100, so the coupon c satisfies c×(0.97+0.93) + 100×0.93 = 100. This gives c = 7/1.90 = 3.68 per 100, using the annuity factor of 1.90 as the divisor.

  1. A3.68%Correct
  2. B3.50%
  3. C7.53%
  4. D3.00%

Explanation

Par yield c = (1 − d2)/(d1 + d2) = (1 − 0.93)/(0.97 + 0.93) = 0.07/1.90 = 3.68%. Dividing by 2 (giving 3.50%) ignores that the annuity factor is the sum of the discount factors, not a plain count of periods. The 7.53% figure divides by d2 only.

Did you get it right without looking?

One question tells you little. A timed set on Pricing Conventions, Discounting, and Arbitrage shows your real accuracy, how long you take and where you lose marks.

Practise Pricing Conventions, Discounting, and ArbitrageFree diagnostic mock

More Pricing Conventions, Discounting, and Arbitrage questions