CFA Practice Question

There are 147 practice questions for this study session.

CFA Practice Question

If the yield curve is upward sloping, which curve is on top of other two curves for a benchmark bond?
A. par curve
B. spot curve
C. forward curve
Explanation: You can think of the par yield for a given maturity as a sort of average of the spot yields for all maturities up to and including the par yield's maturity. Thus, if the par curve is increasing, so par yield n is greater than par yield n - 1, then spot yield n must be above par yield n; the spot curve will lie above the par curve. If the par curve is decreasing, the spot curve will lie below the par curve. If the par curve increases, then decreases, the spot curve will cross it at its highest point. (This is very similar to marginal and average cost from economics.)

Similarly, if the spot curve is increasing, the forward curve will lie above it, and if the spot curve is decreasing the forward curve will lie below it; the forward curve will cross from above to below at the highest point of the spot curve.

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