CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

On June 27, 2010, suppose the five-year yield is 5.38% and the ten-year yield is 5.93%. The estimated six- and eight-year yields are ______.

A. 5.49 and 5.71
B. 5.45 and 5.69
C. 5.44 and 5.77
Correct Answer: A

(5.93 - 5.38)/5 = .11
Estimated six year yield = 5.38 + 0.11 = 5.49
Estimated eight year yield = 5.49 + 0.22 = 5.71

User Contributed Comments 14

User Comment
Gina hmm - what I don't understand is how do we conclude from the info in the question that this will be a linear yield growth (by .11%)?
when I look at -for example- the most common yield curves I would expect a log function?
Gina the question refers to the term structure of interest rates, which in this case obviously has a positive slope -- yield to maturity plot.

confusion was with indiv. price-yield curves!
AdriGul I believe the answer is that the yield curves are based on the on the run treasuries. Any numbers in between the on-the-run treasuries 1,2,5,10 and 30 years is developed by linear extrapolation.
haarlemmer Well, there is no linear relation between the two factors. The way of averaging the yield is not correct pre se. However, give the amount of information, this has to be the only solution.
theBooty interpolation
gsuwp aka bootlegging.
mtcfa This is not bootstrapping or "bootlegging." It is interpolation.
Mariecfa To get a yield for maturities where no on-the-run Treasury issue exists, it is necessary to interpolate from the yield of two on-the-run issues.
Suppose that we want to fill in the gap for each one year of maturity. To determine the amount to add to the on-the run yield as we go from the lower maturity to the higher maturity, the following formula is used:

yield at higher maturity-yield at lower maturity/
number of years between two maturity points

The estimated on the run yield for all intermediate whole-year maturities is found by adding to the yield at the lower maturity the amount computed from the above formula.
hannovanwyk yes, you just describe linear interpolation, but i agree that log will be more accurate in practice but for CFA I i guess this will be sufficient.
magicchip linear interpolation. No other way of answering this question with the information provided.
Beret It's not about accuracy, but about the fact you understood that you need to do interpolation.
2014 Thanks marie
johntan1979 If we don't assume linear relationship, then A, B and C could be right, since curves could go anywhere... convex, concave, combinations
ecapocas Key word there is "estimate". In this case there is limited information so we can't "calculate" the spot rate, we can only estimate it.
You need to log in first to add your comment.