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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 rate for a maturity beyond one year is most likely:

With an upward-sloping par curve, the spot rate at a given longer maturity is higher than the par rate. The par rate blends the lower short-term spot rates that discount the earlier coupons with the maturity spot rate, so the maturity spot rate sits above it.

  1. Aequal to the par rate
  2. Blower than the par rate
  3. Chigher than the par rateCorrect

Explanation

A par bond pays coupons earlier, and those coupons are discounted at lower short-term spot rates. The par yield is therefore a blend of lower early spot rates and the maturity spot rate. With an upward-sloping curve, the maturity spot rate must be above the par rate.

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