CFA Level I · CFA Level I Exam · The Term Structure of Interest Rates: Spot, Par, and Forward Curves
When the par curve is upward sloping, the spot curve derived from it by bootstrapping will most likely lie:
The spot curve will most likely lie above the par curve at longer maturities when the par curve slopes upward. Earlier coupons are discounted at lower rates, so the final cash flow needs a higher spot rate for the bond to be priced at par.
- Abelow the par curve at longer maturities
- Babove the par curve at longer maturitiesCorrect
- Cexactly on the par curve at all maturities
Explanation
With an upward-sloping curve, early coupons are discounted at lower spot rates than the maturity rate, so the final payment must be discounted at a higher spot rate for the bond to price at par. Hence spot rates exceed par rates at longer maturities.
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