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CFA Level I · CFA Level I Exam · Interest Rate Risk and Return

A three-year annual-pay bond with a 5% coupon and par value of 100 is priced to yield 6%. The price of the bond is closest to:

The price is about 97.33. Discounting coupons of 5 and a final payment of 105 at 6% gives 4.717, 4.450 and 88.160. The bond trades below par because its 5% coupon is lower than the 6% required yield.

  1. A97.33Correct
  2. B100.00
  3. C102.77

Explanation

Price = 5/1.06 + 5/1.06^2 + 105/1.06^3 = 4.717 + 4.450 + 88.160 = 97.33. Because the coupon is below the yield, the bond must trade at a discount, so 100.00 is wrong. The 102.77 figure is the price at a 4% yield, which reverses the sign of the yield difference.

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