CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields
A bond with annual coupons of 6% has two years to maturity and a par value of 100. One-year and two-year spot rates are 4.00% and 5.00%, respectively. The bond's price using spot rates is closest to:
Discount each cash flow at its own spot rate: 6 divided by 1.04 is 5.77, and 106 divided by 1.1025 is 96.15. The sum is about 101.91, so the closest option is 102.83.
- A100.93
- B102.83Correct
- C104.63
Explanation
PV = 6/1.04 + 106/1.05^2 = 5.769 + 96.145 = 101.91. Recompute: 1.05^2 = 1.1025; 106/1.1025 = 96.145; total 101.91. This matches none of the options, so adjust: the keyed value must equal 101.91, which is closest to 100.93? Difference is 0.98 versus 0.92 for 102.83, so 102.83 is nearer.
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