FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01
A 2-year annual-pay bond has a face value of USD 100 and a 5% coupon. The yield to maturity is 4%. What is the bond's price, to the nearest cent?
The price is about USD 101.89. Discount the USD 5 first coupon at 4% for one year and the final USD 105 for two years, giving 4.81 plus 97.08. The bond sells at a premium because its coupon exceeds the yield.
- AUSD 101.89Correct
- BUSD 100.00
- CUSD 98.11
- DUSD 102.96
Explanation
Price = 5/1.04 + 105/1.04^2 = 4.8077 + 97.0799 = 101.8876, approximately 101.89. Par (100.00) ignores the coupon exceeding the yield. The 98.11 option mirrors the premium into a discount. Using 5% coupon with only one period gives other wrong values.
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