IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Financial instruments and insurance contracts as cashflow models
A bond of face value Rs 100 is redeemed at par after 2 years and pays annual coupons of Rs 8. Its price to give a yield of 6% effective is closest to which value?
At 6% the 2-year annuity factor is 1.8334 and v squared is 0.8900. The price is 8 times 1.8334 plus 100 times 0.8900, which equals Rs 103.67. It exceeds par because the 8% coupon is higher than the 6% yield.
- ARs 103.67Correct
- BRs 100.00
- CRs 96.33
- DRs 108.00
- Rs 98.15
Explanation
Price = 8 a(2) at 6% + 100 v^2 = 8 x 1.833393 + 100 x 0.889996 = 14.6671 + 88.9996 = 103.67. The price exceeds par because the coupon rate exceeds the yield. Rs 96.33 reverses the premium.
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