Skip to content

FRM Part I · FRM Exam Part I · Bond Yields and Return Calculations

The discount factors are 0.9700 for one year and 0.9300 for two years. Assuming annual coupons, what is the 2-year par yield?

The 2-year par yield is about 3.68%. A par bond is priced at 100, so the coupon equals one minus the final discount factor, 0.07, divided by the sum of the discount factors, 1.90. This differs from the 2-year spot rate of about 3.70%.

  1. A3.50%
  2. B3.70%
  3. C3.40%
  4. D3.68%Correct

Explanation

Par yield c = (1 − DF2)/(DF1 + DF2) = 0.0700/1.9000 = 3.684%. The 3.70% option is roughly the 2-year spot rate, which is not the par rate. The 3.50% option divides 0.07 by 2, ignoring the discounting of the coupons.

Did you get it right without looking?

One question tells you little. A timed set on Bond Yields and Return Calculations shows your real accuracy, how long you take and where you lose marks.

Practise Bond Yields and Return CalculationsFree diagnostic mock

More Bond Yields and Return Calculations questions