CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields
A 2-year annual-pay bond with a 5% coupon and par of 100 is priced at 100.00 and has a yield to maturity of 5.00%. The one-year spot rate is 4.00%. The two-year spot rate is closest to:
Subtract the present value of the first coupon, 5 divided by 1.04, which is 4.81, from 100 to get 95.19. Then 105 divided by 95.19 is 1.1030, whose square root is 1.0502, so the two-year spot rate is about 5.03%.
- A4.00%
- B5.03%Correct
- C6.00%
Explanation
Set 100 = 5/1.04 + 105/(1+s)^2. 5/1.04 = 4.808, so 105/(1+s)^2 = 95.192. (1+s)^2 = 1.10301, so 1+s = 1.05024, giving s = 5.02%, about 5.03%. With a flat 4% the price would be higher, so 4.00% is wrong. 6.00% is too high.
Did you get it right without looking?
One question tells you little. A timed set on Fixed-Income Bond Valuation: Prices and Yields shows your real accuracy, how long you take and where you lose marks.
More Fixed-Income Bond Valuation: Prices and Yields questions
- Two option-free bonds have the same maturity and yield-to-maturity. Bond X has a 2% coupon and Bond Y has a 6% coupon. Compared with Bond Y,…
- A 10-year bond with a 6% annual coupon and par value of 1,000 is priced at 1,053.15. It can be called in three years at 1,030. The yield to …
- Two option-free bonds have the same maturity and the same yield-to-maturity of 4%. Bond X has a coupon rate of 6% and Bond Y has a coupon ra…
- A spot rate is best described as the:
- A 5-year corporate bond yields 4.60% and a 5-year government bond with the same payment frequency yields 3.85%. The yield spread of the corp…
- A bond is priced using a semiannual-pay convention. It has a face value of 1,000, a 6% annual coupon rate, two years to maturity, and a stat…