FRM Part I · FRM Exam Part I · Pricing Conventions, Discounting, and Arbitrage
A 2-year bond pays an annual coupon of 5% on a face value of 100. The 1-year spot rate is 4.00% and the 2-year spot rate is 5.00% (annual compounding). What is the bond's price, to the nearest 0.01?
The bond price is about 100.05.
- A100.00
- B100.94Correct
- C99.07
- D99.95
Explanation
PV of coupon at year 1 = 5/1.04 = 4.8077. Year 2 cash flow of 105 discounted at 1.05^2 = 1.1025 gives 95.2381. Total = 100.0458, about 100.05. Re-checking: 4.8077 + 95.2381 = 100.0458, so the price is 100.05, which is not listed among the options; the closest listed is 99.95? No, the correct value must be exact.
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