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

In bootstrapping spot rates from par rates, the analyst most likely solves for each successive spot rate by:

Bootstrapping works forward from the shortest maturity: earlier coupons are discounted at the spot rates already derived, and the price-equals-par condition is solved for the one unknown spot rate applying to the final cash flow.

  1. Aaveraging the par rates of the two nearest maturities
  2. Bdiscounting earlier coupons at previously derived spot rates and solving for the final spot rateCorrect
  3. Capplying the longest-maturity par rate to every cash flow of the bond

Explanation

Bootstrapping sets the par bond's price to 100 and uses already-found shorter spot rates for early cash flows, leaving one unknown spot rate for the final cash flow.

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