Explanation:
The formula to calculate a bond's price at a given point in time is shown as follows:
B = [\`$1.75` / (1 + 0.0275 / 2)] + [\`$1.75` / (1 + 0.028 / 2)^2] + [\`$1.75` / (1 + 0.0295 / 2)^3] + [\`$101.75` / (1 + 0.0305 / 2)^4] = 1.7263 + 1.702 + 1.6748 + 95.7729 = \`$100.88`Note that because the bond's coupon rate is higher than any of the spot rates, this implies that it is a premium bond, and any choices below par can be quickly eliminated.
(Book 3, Module 42.2, LO 42.d)
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Question 93
A financial analyst is pricing a two-year, 3.5% semiannual coupon bond with a face value of $100 using the spot rates in the following table:
| Maturity (Months) | Spot Rate (%) |
|---|---|
| 6 | 2.75 |
| 12 | 2.80 |
| 18 | 2.95 |
| 24 | 3.05 |
The bond's price will be closest to:
A
$92.16.
B
$100.88.
C
$101.07.
D
$102.13.
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