Chartered Financial Analyst Level 1

Chartered Financial Analyst Level 1

Get started today

Ultimate access to all questions.

An analyst evaluates a bond with the following characteristics:

  • Annual coupon rate: 4%
  • Time to maturity: 3 years
  • Par value: $100,000 If the market discount rate is 5%, the bond's market value is most likely:

Explanation:

The correct answer is B because the bond's price is the present value of its promised cash flows, calculated as follows:

  1. Year 1 Coupon Payment: 4,000/(1+54,000 / (1 + 5%)^1 = 3,809.52
  2. Year 2 Coupon Payment: 4,000/(1+54,000 / (1 + 5%)^2 = 3,628.12
  3. Year 3 Coupon Payment + Principal: 104,000/(1+5104,000 / (1 + 5%)^3 = 89,839.11

Total Price: 3,809.52+3,809.52 + 3,628.12 + 89,839.11=89,839.11 = 97,276.75 ≈ $97,277

Calculator Inputs:

  • FV = $100,000
  • I = 5%
  • N = 3
  • PMT = $4,000
  • PV ≈ $97,277

Why Other Options Are Incorrect:

  • A: This ignores the coupon payments for years 1 and 2, leading to an undervalued price.
  • C: This incorrectly swaps the coupon rate and market discount rate, resulting in an overvalued price.
Powered ByGPT-5