- CFA Exams
- CFA Level I Exam
- Study Session 12. Fixed Income (1)
- Reading 32. The Term Structure and Interest Rate Dynamics
- Subject 7. Yield Curve Factor Models
CFA Practice Question
Assume that the annualized standard deviation of the 10-year Treasury yield is 4%. The current level of the 10-year Treasury yield is 6%. The probability distribution for the percentage change in 10-year Treasury yields is approximately normally distributed. Given that there is a 68% probability that the yield will be between one standard deviation below and above the expected value, we can conclude that there is a 68% probability that the yield next year will be between ______ and ______.
A. 5.84% and 6.16%.
B. 2% and 10%.
C. 5.76% and 6.24%.
Explanation: Since the current level of the 10-year T-yield is 6%, then the annual standard deviation of 4% translates into a 24 basis point standard deviation (4% x 6% = 0.24%). The mean is 6%. The yield will be between 6% - 0.24% and 6% + 0.24%.
User Contributed Comments 5
User | Comment |
---|---|
tsiapras | the calc. is as follows: 6% +/- 1*(4%*6%)= answer c the key is to consider that the yield is "bewteen one standard deviation" i.e. 1*(4%*6%) |
dblueroom | The key is to translate 4% annual std to 24 bps std. I figured out the 1 standard deviation from the 68% confidence interval. |
aggabad | volatility=standard deviation |
thanhb91 | For lognormal distribution, the standard deviation of one year rate is: i*sd = 4%*6% |
linhgaga | hi can someone explain in more detail why we can't use 4% as sd? |