CFA Level I · CFA Level I Exam · The Term Structure of Interest Rates: Spot, Par, and Forward Curves
When the spot curve is upward sloping, the implied forward curve most likely lies:
The forward curve lies above the spot curve when the spot curve slopes upward. A longer-maturity spot rate is a geometric average of forward rates, so for it to keep rising, the newer forward rates must be higher than the existing spot rates.
- Abelow the spot curve
- Bequal to the spot curve
- Cabove the spot curveCorrect
Explanation
Each longer spot rate is an average of the earlier forward rates. For the average to rise with maturity, later forward rates must exceed the spot rate, so the forward curve lies above an upward-sloping spot curve.
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