FRM Part I · FRM Exam Part I · Interest Rates
A two-year bond has a face value of 1,000 and pays an annual coupon of 5%. Its yield to maturity is 4% per year, compounded annually. What is the bond's price?
The price is 1,018.86. Discounting the 50 coupon in year one and the 1,050 final payment in year two at 4% gives about 48.08 plus 970.78. The bond sells at a premium because its 5% coupon is higher than the 4% yield.
- A1,018.86Correct
- B1,000.00
- C981.14
- D1,050.00
Explanation
Price = 50/1.04 + 1,050/1.04^2 = 48.08 + 970.78 = 1,018.86. The coupon exceeds the yield, so the bond trades at a premium. 981.14 flips the sign of the premium, and 1,000 ignores the gap between coupon and yield.
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