Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lc}
\text { Year } & \text { Forward Interest Rate } \
0 & \text { (today) } 3\% \
1 & 4\% \
2 & 5\% \
3 & 6\%
\end{array}$
What is the price of a 2-year maturity bond with a 5% coupon rate paid annually? (Par value = $1,000.)
A) $1,092.97
B) $1,054.24
C) $1,028.50
D) $1,073.34
E) None of the options are correct.

Question

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lc}
\text { Year } & \text { Forward  Interest Rate } \
0 & \text { (today) } 3\% \
1 & 4\% \
2 & 5\% \
3 & 6\%
\end{array}$
 What is the price of a 2-year maturity bond with a 5% coupon rate paid annually? (Par value = $1,000.)
A) $1,092.97
B) $1,054.24
C) $1,028.50
D) $1,073.34
E) None of the options are correct.

Quizplus · Accepted Answer

The bond price is calculated by discounting the cash flows (coupon payments and par value) using the given forward interest rates. The cash flows are $50 in year 1 and $1,050 in year 2. The present value of these cash flows is $1,028.50.

Suppose That All Investors Expect That Interest Rates for the 4