CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields
A 3-year annual-pay bond has a 6% coupon and a face value of 1,000. The market discount rate is 5% per year. The bond's price is most likely closest to:
The bond is worth about 1,027.23. Discounting the three coupons of 60 and the 1,000 principal at 5% gives a price above par, because the coupon rate of 6% exceeds the market discount rate of 5%.
- A1,000.00
- B1,027.23Correct
- C1,060.00
Explanation
Price = 60/1.05 + 60/1.05^2 + 1,060/1.05^3 = 57.14 + 54.42 + 915.66 = 1,027.23. Check: annuity factor 2.7232 x 60 = 163.39, plus 1,000/1.157625 = 863.84, total 1,027.23. A price of 1,000 would apply only if the discount rate equaled the coupon rate.
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