CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features
A 3-year bond with a face value of 1,000 pays a 4% annual coupon and is priced at 1,000 (par). A second bond is a 3-year zero-coupon bond with the same yield to maturity of 4%. Which of the following is most likely the price of the zero-coupon bond, to the nearest currency unit?
The zero-coupon bond would be priced at about 889. With no coupons, its price is the face value of 1,000 discounted three years at 4%: 1,000 divided by 1.124864. Compounding upward instead of discounting gives the incorrect 1,125.
- A889Correct
- B1,000
- C1,125
Explanation
Price = 1,000/(1.04)^3 = 1,000/1.124864 = 889. The 1,000 option wrongly treats it like the par coupon bond, and 1,125 compounds the face value forward (1,000 × 1.04^3) instead of discounting.
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