FRM Part I · FRM Exam Part I · Interest Rates
A 2-year bond has a face value of 100 and pays an annual coupon of 6%. The yield to maturity is 5% per year, compounded annually. What is the bond's price?
The price is about 101.86. Discount the first coupon of 6 for one year and the final cash flow of 106 for two years at 5%. Because the coupon exceeds the yield, the bond trades above par, so any price at or below 100 is wrong.
- A101.86Correct
- B98.14
- C100.00
- D102.00
Explanation
Price = 6/1.05 + 106/1.05^2 = 5.7143 + 96.1451 = 101.86. The bond pays a coupon above the market yield, so it trades at a premium. The 98.14 option reflects a discount, which is the wrong direction. The 100.00 option would apply only if the coupon equalled the yield.
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