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

A 3-year zero-coupon bond with a face value of 1,000 is priced to yield 5% per year, compounded annually. What is its price?

The price is 863.84. A zero-coupon bond's price is its face value discounted at the annual yield for the number of years: 1,000 divided by 1.05 cubed. Using simple interest or the wrong number of periods gives incorrect values.

  1. A863.84Correct
  2. B869.57
  3. C850.00
  4. D822.70

Explanation

Price = 1,000 / 1.05^3 = 1,000 / 1.157625 = 863.84. The 869.57 option uses simple interest (1,000 / 1.15). The 850.00 option subtracts 15% of face value. The 822.70 option discounts for four years instead of three.

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