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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

A three-year annual-pay bond has a face value of 1,000 and a 5% coupon rate. The market discount rate is 6%. The bond's price is closest to:

The price is about 973. Discounting coupons of 50 for three years and the 1,000 principal at 6% gives 47.17 + 44.50 + 881.60 = 973.27. The bond trades at a discount because its 5% coupon is below the 6% market rate.

  1. A973Correct
  2. B1,000
  3. C1,027

Explanation

Coupon = 50. PV = 50/1.06 + 50/1.1236 + 1,050/1.191016 = 47.17 + 44.50 + 881.60 = 973.27. Because the coupon rate is below the discount rate, the bond trades at a discount; 1,027 reflects the wrong sign (discount rate below coupon).

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