Question #32
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 12
Status: Correct
Correct Answer: A
Question
The following are some of the current par rates: Year Par rate 1 1.00% 2 2.00% 3 3.00% 4 4.00% 5 5.00% Using bootstrapping, the 2-year spot rate is closest to:
Answer Choices:
A. 1.50%
B. 2.01%
C. 2.25%
Explanation
S1 = 1.00% given
For a 2-year bond,
(1+S2)2 = 102/98.01 = 1.0407
(1+S2) = 1.0201
S2 = 2.01%