FRM Part I · FRM Exam Part I · Interest Rates
Discount factors are 0.9800 for one year and 0.9500 for two years. What is the 2-year par yield for an annual-pay bond, expressed to two decimals?
The 2-year par yield is about 2.59%. A par bond is priced at 1, so the coupon equals one minus the final discount factor divided by the sum of the discount factors: 0.05 divided by 1.93. Ignoring coupon discounting gives the wrong 2.50%.
- A2.59%Correct
- B2.50%
- C5.26%
- D5.10%
Explanation
The par coupon satisfies c(d1+d2) + d2 = 1, so c = (1 - 0.95)/(0.98 + 0.95) = 0.05/1.93 = 2.59%. 2.50% results from dividing 0.05 by 2 and ignoring discounting of the coupons. 5.10% divides by d1 alone, which ignores the second coupon's present value.
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