If an analyst has daily published par rates and wants to build an approximate spot curve for pricing, which practical step is recommended in the chapter?
Explanation
Bootstrapping from par rates is the practical method to construct a consistent spot (zero) curve for pricing purposes.
Other questions
Which of the following best defines a spot rate?
A 3-year bond pays annual coupons of 1.00% and par is 100. Given one-year spot rate of 1.00%, two-year spot rate of 1.50% and three-year spot rate of 2.00%, the bond price is closest to:
Which equation expresses the relationship between spot rates z_A, z_B and the implied forward rate IFR_{A,B-A} (effective compounding)?
Given spot rates (annual compounding) z1 = 1.00%, z2 = 1.50%, z3 = 2.00%, what is the 2y1y implied forward rate (the one-year rate two years from now)?
Which of the following describes a par rate?
Given spot rates with annual compounding: z1=2.00%, z2=2.30%, z3=2.50%, what is the three-year par rate (annual coupon) closest to?
If (1 + z0)^1*(1 + 1y1y)*(1 + 2y1y) = (1 + z3)^3, and z0 = 1.88%, 1y1y = 2.77%, 2y1y = 3.54%, what is the three-year spot rate z3?
Which statement about forward rates is most accurate?
How do you compute the par coupon PMT for an N-period par bond given spot rates z1..zN?
If the spot curve is flat at 2.50% for all maturities, what is the 5-year par rate (annual) and 1-year forward rates?
Which of the following is a correct interpretation of the 3y1y forward rate?
Suppose an investor can invest in a 3-year zero at z3 = 3.65% or invest in a 2-year zero at z2 = 3.65% and then invest at an implied 2y1y forward for one year. If z3 = 3.65% and z4 = 4.18%, what is the implied 3y1y forward rate?
If par rates are derived from spot rates up to maturity, then to compute a 4-year par rate you need spot rates for which maturities?
True or false: Given spot rates, the forward curve can be derived uniquely and the forward curve always equals market expectations of future short rates.
Which curve is most commonly published as benchmark yields (for example, the standard Treasury curve)?
Given spot rates (annual compounding) z1=0.3117%, z2=0.5680%, z3=0.7977%, what is the 2y1y implied forward rate (one-year rate two years from now) expressed approximately?
If a 3-year bond is valued using forward rates as discount factors, which of the following is true?
Which of the following describes the relationship between an upward-sloping spot curve and the forward curve?
A 90-day Treasury bill is quoted on a 360-day discount basis at 3.45% with face value 10,000,000. Using PV = FV*(1 - Days/Year*DR), what is the price?
Which formula correctly transforms a money-market discount-quoted instrument to its discount rate DR given PV and FV?
A 90-day commercial paper has a quoted discount rate of 0.120% on a 360-day basis and FV = 100. What is the price PV?
Which statement is accurate about bond prices calculated using a single yield-to-maturity versus a spot curve?
Which of the following is true when converting a money-market discount rate to a bond-equivalent yield (BEY)?
A three-year corporate bond has YTM = 2.707% and the three-year government spot rate is 1.904%. What is the G-spread in basis points?
If a bond’s spot-derived price is 99.50 and you solve for the single YTM that equates the cash flows to 99.50, is the YTM equal to any of the spot rates used?
Which of the following methods is theoretically correct for calculating portfolio duration and convexity?
Why do practitioners commonly use par rates as published benchmarks instead of raw zero-coupon spot rates?
Given a sequence of one-year forward rates: 0y1y = 1.88%, 1y1y = 2.77%, 2y1y = 3.54%, find the implied 3-year spot rate (annual compounding).
If you observe a downward-sloping spot curve, what can you generally say about the forward curve?
Which of the following is the correct algebraic expression for the PV of a coupon bond using spot rates Z1..ZN?
A bond is priced using spot rates. If market liquidity or tax rules change for older government issues, what practical adjustment does the chapter suggest when constructing the spot curve?
True or false: If two different spot curves (one upward sloping, one downward sloping) have similar three-year spot rates, a 3-year bond priced with either curve could have the same price and YTM.
Which calculation method for forward rates implies the spot curve is the geometric average of forward one-year rates?
A 2.25% annual-pay bond matures in 9 years and is priced at par on issuance. Which factor will increase its par rate computed from spot rates: raising short-term spot rates (all else equal), raising long-term spot rates (all else equal), or lowering all spot rates proportionally?
Given spot rates for Canada and Australia, pricing a 5-year Canadian government 1.00% coupon bond produced 99.50 and an Australian 0.80% coupon bond produced 99.99. What explains the difference in prices despite similar maturities?
Which of the following best explains why an inverted spot curve implies lower forward rates for future one-year periods?
Match the required spot rates to calculate the 2y3y forward rate (implied three-year rate two years from now).
If the 5-year par rate curve is lower than the corresponding spot curve at the same maturities in an upward-sloping spot environment, which statement is true?
Which of the following is true about converting money market discount quotes to bond-equivalent yields before comparison across instruments?
When deriving the Z-spread for a corporate bond priced using government spot rates, which equation is solved for Z?
Which of the following is true about par, spot and forward curves when the spot curve is upward-sloping and steepens at long maturities?
Which pair of spot rates do you need to compute a 2-year forward starting in three years (i.e., 3y2y)?
If a bond's price using spot curve discounting equals 99.126 and the three-year spot rate in that curve is approximately 0.7977%, what would you expect about the bond's YTM relative to the three-year spot rate?
Which of the following is an accurate statement about using forward rates for valuation?
A market participant wants to hedge a portfolio against non-parallel yield-curve movements. Which curve-based measure introduced in the chapter is most useful to identify sensitivity at specific maturities?
Which of the following best summarizes the relationship among spot, par, and forward yield curves?
If the 10-year spot rate is 1.5809% and the implied 9y1y forward is 1.4872% (approx), what does the sign and magnitude of 9y1y indicate about market expectations?
An analyst uses Microsoft Excel's RATE or Solver function in examples in the chapter. For which tasks are these tools particularly recommended?