Answer: 99.86.

**Explanation:** The correct answer is **B** (99.86). The price of the bond is calculated using the spot rates as discount factors for each cash flow. The formula for the present value (PV) of the bond is: \[ PV = \frac{PMT}{(1 + Z_1)^1} + \frac{PMT}{(1 + Z_2)^2} + \frac{PMT + FV}{(1 + Z_3)^3} \] Where: - \( PMT \) is the annual coupon payment (4). - \( FV \) is the face value of the bond (100). - \( Z_1, Z_2, Z_3 \) are the spot rates for 1, 2, and 3 years, respectively (6%, 5%, 4%). Substituting the values: \[ PV = \frac{4}{(1 + 0.06)^1} + \frac{4}{(1 + 0.05)^2} + \frac{104}{(1 + 0.04)^3} \] Calculating each term: 1. \( \frac{4}{1.06} = 3.77358 \) 2. \( \frac{4}{1.1025} = 3.62812 \) 3. \( \frac{104}{1.1249} = 92.4556 \) Adding these together: \[ 3.77358 + 3.62812 + 92.4556 = 99.8573 \approx 99.86 \] **Why not A or C?** - **A (97.28)** is incorrect because it uses the average of the spot rates (5%) for all cash flows, which is not the correct method. - **C (100.00)** is incorrect because it uses the 3-year spot rate (4%) for all cash flows, which is also not the correct method.

Author: LeetQuiz Editorial Team