Skip to content

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

A 5-year zero-coupon bond has a face value of 1,000 and a yield of 4.00% per year, compounded annually. What is its price?

The price is 821.93. A zero-coupon bond's price is its face value divided by (1 + yield) raised to the number of years, so 1,000 divided by 1.04 to the fifth power equals about 821.93, using annual compounding as stated.

  1. A800.00
  2. B820.35
  3. C821.93Correct
  4. D833.33

Explanation

Price = 1,000 / 1.04^5 = 1,000 / 1.216653 = 821.93. The 820.35 option discounts at 2% for 10 semiannual periods, which wrongly applies semiannual compounding. The 833.33 option uses simple interest (1,000/1.20). The 800.00 option subtracts 20% of face value.

Did you get it right without looking?

One question tells you little. A timed set on Bond Yields and Return Calculations shows your real accuracy, how long you take and where you lose marks.

Practise Bond Yields and Return CalculationsFree diagnostic mock

More Bond Yields and Return Calculations questions