- CFA Exams
- CFA Level I Exam
- Study Session 14. Fixed Income (1)
- Reading 44. Introduction to Fixed-Income Valuation
- Subject 7. The Maturity Structure of Interest Rates

###
**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 ______.

B. 5.45 and 5.69

C. 5.44 and 5.77

A. 5.49 and 5.71

B. 5.45 and 5.69

C. 5.44 and 5.77

Correct Answer: A

Estimated six year yield = 5.38 + 0.11 = 5.49

Estimated eight year yield = 5.49 + 0.22 = 5.71

(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. |