CFA Level I · CFA Level I Exam · The Term Structure of Interest Rates: Spot, Par, and Forward Curves
The annual-compounding spot rates are 3.00% for one year and 4.00% for two years. The two-year discount factor is closest to:
The two-year discount factor is about 0.9246. It equals one divided by one plus the two-year spot rate, squared: 1/1.0816. Only the two-year spot rate is used; the one-year rate is irrelevant for this factor.
- A0.9246Correct
- B0.9615
- C0.9709
Explanation
Discount factor = 1/(1.04)^2 = 1/1.0816 = 0.9246. 0.9709 is the one-year factor at 3.00% (1/1.03). 0.9615 is 1/1.04, which ignores compounding over two years.
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