A two-year coupon bond has a face value of $1,000, a coupon rate of 4% and a yield to maturity of 6%. What is the price of the bond?

Question

Quizplus · Accepted Answer

The price of a bond can be calculated using the formula for the present value of its future cash flows, which include the annual coupon payments and the face value at maturity. For a two-year coupon bond with a face value of $1,000, a coupon rate of 4%, and a yield to maturity of 6%, the annual coupon payment is $40 (4% of $1,000). The price of the bond is the present value of these cash flows, calculated as:$$ \text{Price} = \frac{\$40}{(1+0.06)} + \frac{\$40}{(1+0.06)^2} + \frac{\$1,000}{(1+0.06)^2} $$$$ \text{Price} = \frac{\$40}{1.06} + \frac{\$40}{(1.06)^2} + \frac{\$1,000}{(1.06)^2} $$$$ \text{Price} = \$37.74 + \$35.59 + \$890 $$$$ \text{Price} = \$963.33 $$Therefore, the correct answer is $963.33, which corresponds to option B.

A Two-Year Coupon Bond Has a Face Value of $1,000