FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01
A two-year bond with a face value of 100 pays an annual coupon of 5%. The yield to maturity is 4% per year with annual compounding. What is the bond's price?
The price is about 101.89. Discount the first coupon of 5 for one year and the final payment of 105 for two years at 4%. This gives 4.81 plus 97.08. The price exceeds par because the coupon is above the yield.
- A97.26
- B100.00
- C101.89Correct
- D105.77
Explanation
Price = 5/1.04 + 105/1.04^2 = 4.8077 + 97.0784 = 101.886, about 101.89. Option A omits the final coupon from the last cash flow (it uses 100 instead of 105). Option D discounts both cash flows (5 + 105 = 110) by only one period.
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