CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Fixed-Rate Bonds
Spot rates (annual compounding) are 2.00% for one year, 3.00% for two years and 4.00% for three years. The price of a 3-year annual-pay bond with a 5% coupon and par value of 100 is closest to:
The bond price is about 102.99. Each cash flow is discounted at its own spot rate: 5 at 2%, 5 at 3% over two years, and 105 at 4% over three years. The sum is roughly 102.96, above par because the coupon exceeds the spot rates.
- A100.00
- B102.99Correct
- C105.43
Explanation
PV = 5/1.02 + 5/1.03^2 + 105/1.04^3 = 4.902 + 4.713 + 93.344 = 102.96. Closest option is 102.99. Using the 4% three-year rate for all flows gives 102.78, and the 105.43 value discounts at too low a rate.
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