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FRM Part I · FRM Exam Part I · Bond Yields and Return Calculations

A 2-year bond with face value 100 pays a 6% annual coupon in two semiannual payments. Its yield is 8% per year, quoted with semiannual compounding. What is the bond's price, to the nearest cent?

The price is 96.37. With semiannual compounding, discount four coupons of 3 and the 100 principal at 4% per half-year. The coupons are worth about 10.89 and the principal about 85.48, giving 96.37.

  1. A83.44
  2. B96.37Correct
  3. C96.43
  4. D107.26

Explanation

Each period has a coupon of 3 and a discount rate of 4% over 4 periods. The annuity factor is 3.6299, so the coupons are worth 10.89. The principal is worth 100/1.04^4 = 85.48. The total is 96.37. The 96.43 option discounts annually, which ignores the stated semiannual compounding. The 107.26 option uses a coupon of 6 per period.

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