CFA Level I · CFA Level I Exam · The Term Structure of Interest Rates: Spot, Par, and Forward Curves
The annual spot rates are 2.00% for one year, 3.00% for two years and 4.00% for three years. The three-year annual-pay par rate is closest to:
The three-year par rate is about 3.95%. It equals one minus the three-year discount factor, divided by the sum of the three discount factors. Because the spot curve is upward sloping, the par rate falls slightly below the three-year spot rate of 4.00%.
- A3.00%
- B3.95%Correct
- C4.00%
Explanation
Discount factors are 0.980392, 0.942596 and 0.888996, which sum to 2.811984. Par rate = (1 - 0.888996)/2.811984 = 3.95%. Choosing 4.00% wrongly treats the par rate as equal to the spot rate, and 3.00% wrongly averages the spot rates.
Did you get it right without looking?
One question tells you little. A timed set on The Term Structure of Interest Rates: Spot, Par, and Forward Curves shows your real accuracy, how long you take and where you lose marks.
More The Term Structure of Interest Rates: Spot, Par, and Forward Curves questions
- The spot curve is upward sloping. Relative to the two-year spot rate, the forward rate for a one-year loan starting in two years (2y1y) is m…
- A yield curve moves so that 2-year yields rise by 0.50% while 10-year yields rise by 0.10%. This movement is best described as a:
- In the context of the term structure of interest rates, a par rate for a given maturity is best described as the:
- An analyst observes annual-pay par rates of 2.00% for a one-year bond and 3.00% for a two-year bond. The one-year spot rate equals the one-y…
- The one-year, two-year and three-year discount factors are 0.9524, 0.9070 and 0.8638. An analyst wants the two-year spot rate, annual compou…
- The 1-year spot rate is 2.0%, the 2-year spot rate is 3.0%, and the 3-year spot rate is 4.0%, all annual compounding. The 3-year par rate is…