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Answer: a geometric mean of the spot rate for a security with a maturity of T = 1 and a series of T - 1 forward rates.
The spot rate for a security with maturity T can be expressed as the geometric mean of the one-period spot rate and a series of T-1 forward rates. This relationship is derived from the fundamental bond pricing formula where the price of a zero-coupon bond equals the present value of its face value discounted at the spot rate. The geometric mean relationship ensures that the spot rate properly reflects the compounding of interest rates over multiple periods.
Author: LeetQuiz Editorial Team
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The spot rate for a security with a maturity of T can be expressed as:
A
a geometric mean of a series of T - 1 spot rates and the one-period forward rate at T.
B
a geometric mean of the spot rate for a security with a maturity of T = 1 and a series of T - 1 forward rates.
C
an arithmetic mean of the spot rate for a security with a maturity of T = 1 and a series of T - 1 forward rates.