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 par rate for a given maturity is most likely:
The par rate is most likely below the spot rate for that maturity. A par bond's coupon reflects discounting of earlier coupons at lower short-term spot rates, so it is a blended rate that lags the longer spot rate when the curve slopes upward.
- Aabove the spot rate at that maturity
- Bequal to the spot rate at that maturity
- Cbelow the spot rate at that maturityCorrect
Explanation
A par rate is a weighted average of the discount factors across all earlier dates, so it reflects lower early spot rates. With an upward-sloping curve, the par rate is therefore below the spot rate at the same maturity.
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