Question from Schweser “Sample Exams” book, Exam 1, AM, #101 A 10 year zero coupon bond is priced to yield 7.00%. A 10 year 7.00% coupon bond of comparable quality is currently trading at $101.50. The most likely cause of the difference is: A) calculation error - spot rate price should be the same as the yield to maturity price B) shift in the yield curve C) differences in convexity D) rising spot rate curve. ANS: D) Why can’t it be C)?
How can rising spot rate curve affect this. Does it mean that the Zero volatility spread for the two bonds are different.
my assumption is that the 0 cupon bond gets discounted at a rate that is higher to the rates the cupons of the second bond get discounted. therefore if that happens the yield curve should be rising. ?