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 Fixed Income | Study Session 15: Reading 53 Par Rate 
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Joined: 24 Dec 2016
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Dear everyone,

I have a question that unable to solve the equation as written in Page 50, Level I, Book 5 in SchweserNotes CFA 2017 Exam Prep for this topic: LOS 53.g: Define and compare the spot curve, yield curve on coupon bonds, par curve, and forward curve.

“Consider a 3-year annual-pay bond and spot rates for one, two, and three years of S1, S2, and S3. The following equation can be used to calculate the coupon rate necessary for the bond to be trading at par.

[PMT / (1+S1)] + [PMT / (1+S2)^2] + [PMT + 100 / (1+S3)^3] = 100

With spot rates of 1%, 2%, and 3%, a 3-year annual par bond will have a payment that will satisfy:

[PMT / 1.01] + [PMT / (1.02)^2] + [PMT + 100 / (1.03)^3] = 100, so the payment is 2.96 and the par bond coupon rate is 2.96%.”

I only know how to calculate the one-year par rate, but I don’t know how to calculate the two-year and three-year par rate. How to use BA II Plus calculator to calculate this equation in order to get the answer is 2.96 for the payment?

Appreciate if anyone could guide me and and show me the steps to calculate the par rates for the PMT.

Thanks a lot.


24 Dec 2016
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