Explanation:
Key rates are the yields of specific par bonds representing specific maturity points on the par yield curve. By definition, if a bond is priced exactly at par, its yield to maturity is equal to its coupon rate. Because the key rates represent the yields of these par bonds, a bond that is priced exactly at par and has a maturity exactly equal to a key rate term will have a yield that is identical to that key rate.
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Q.37 Cyta dela Bank from Poznan, Poland, needs to measure the yield of a coupon bond portfolio. One of the bonds in the portfolio has the maturity exactly equal to the term of a key rate, and the price of that bond is exactly par. How do the bond’s yield and the key rate compare?
A
They are identical
B
The bond’s yield is higher than the key rate
C
The bond’s yield is lower than the key rate
D
The bond’s yield has no discernible relationship with the key rate
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