FRM Part I · FRM Exam Part I · Interest Rates
A 2-year bond with a face value of 100 pays a 5% annual coupon. The yield to maturity is 6% per year, compounded annually. What is the bond's price?
The price is about 98.17. Discount the 5 coupon at 6% for one year and the 105 final payment at 6% for two years, then add them: 4.717 plus 93.450. Since the coupon is below the yield, the bond sells below par.
- A96.17
- B98.17Correct
- C100.00
- D101.83
Explanation
Price = 5/1.06 + 105/1.06^2 = 4.717 + 93.450 = 98.17. Because the coupon is below the yield, the bond trades at a discount to par. The 101.83 option has the wrong sign on the discount, treating the bond as if it paid a premium.
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