Explanation:
To compute the price of the bond, discount each cash flow back to the present at the appropriate spot rates. $1.75 is the coupon payment per period. Period 3 pays principal plus coupon of $101.75. The first payment computation is as follows:
Solve for PV → 1.73
| Maturity (Years) | Spot Rate (%) | PV |
|---|---|---|
| 0.5 | 2.20% | 1.73 |
| 1.0 | 2.25% | 1.71 |
| 1.5 | 2.30% | 1.69 |
| 2.0 | 2.35% | 1.67 |
| 2.5 | 2.40% | 1.65 |
| 3.0 | 2.45% | 94.58 |
| Bond price: | 103.03 |
(Book 3, Module 42.2, LO 42.d)
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Question 6
Assume a 3-year bond with a face value of `$100` pays a 3.5% coupon on a semiannual basis. What is the price of the bond according to the following spot rates?
| Maturity (years) | Spot rate (%) |
|---|---|
| 0.5 | 2.20% |
| 1.0 | 2.25% |
| 1.5 | 2.30% |
| 2.0 | 2.35% |
| 2.5 | 2.40% |
| 3.0 | 2.45% |
A
94.58
B
98.85
C
101.15
D
103.03
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