A 2-year T-Note has a face value of $1,000 and pays annual coupons of $75. The next coupon is due in one year. What is the correct price for the coupon bond today? Use the term structure of interest rates shown below to answer the question. $$\begin{array} { | c | c | }
\hline \text { Term } & \text { Spot Rate } \
\hline \text { 1-year } & 6.5 \% \
\hline \text { 2-years } & 8 \% \
\hline
\end{array}$$

Question

A 2-year T-Note has a face value of $1,000 and pays annual coupons of $75. The next coupon is due in one year. What is the correct price for the coupon bond today? Use the term structure of interest rates shown below to answer the question. $$\begin{array} { | c | c | } 
\hline \text { Term } & \text { Spot Rate } \
\hline \text { 1-year } & 6.5 \% \
\hline \text { 2-years } & 8 \% \
\hline
\end{array}$$

Quizplus · Accepted Answer

The price of the bond is calculated by discounting the cash flows (coupon payments and face value) using the respective spot rates. The present value of the $75 coupon due in one year is $75 / (1 + 0.065) = $70.42. The present value of the $1,075 (coupon + face value) due in two years is $1,075 / (1 + 0.08)^2 = $921.58. Adding these gives $70.42 + $921.58 = $992.

A 2-Year T-Note Has a Face Value of $1,000 and Pays