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IAI Actuarial Core Principles · Economic Modelling · Models of the term structure of interest rates

In the context of the term structure of interest rates, which statement correctly describes the par yield for a given term?

The par yield for a term is the coupon rate at which a coupon-bearing bond of that term is priced exactly at par when its cash flows are discounted using the spot rates. It differs from the spot rate, which applies to a single zero-coupon payment.

  1. AThe spot rate for that term applied to a zero-coupon bond
  2. BThe coupon rate at which a coupon-paying bond of that term prices exactly at parCorrect
  3. CThe rate on a one-year forward contract starting at that term
  4. DThe yield on a bond that trades at a premium to par
  5. The average of the short rate over that term

Explanation

The par yield is the coupon rate that makes a bond of the given term price at its face value when discounted at the spot curve. A spot rate refers to a zero-coupon investment, and a forward rate refers to a future period, so those options describe different quantities.

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