- 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

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**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%.

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**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? |