Question #45
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 18
Status: Correct
Correct Answer: A
Question
The following are some of the current par rates: Year Par rate 1 5.00% 2 6.00% 3 7.00% Using bootstrapping, the 3-year spot rate is closest to:
Answer Choices:
A. 6.93%
B. 6.67%
C. 7.09%
Explanation
S1 = 5.00% given
For the 2-year par bond,
(1+S2)2 = 106/94.29 = 1.1242
(1+S2) = 1.0603
S2 = 6.03%
For the 3-year par bond,
(1+S3)3 = 107/87.11 = 1.2283
(1+S3) = 1.0709 or S3 = 7.09%