A two-year coupon bond has a face value of $1,000, a coupon rate of 5% and a yield to maturity of 2%. 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 repayment at maturity. Given a coupon rate of 5% on a $1,000 face value bond, the annual coupon payment is $50. With a yield to maturity of 2%, the price of the bond is calculated as the present value of the $50 annual payments for two years plus the present value of the $1,000 face value repaid at the end of two years. The calculation is as follows:Price = $50 / (1 + 0.02) + $50 / (1 + 0.02)^2 + $1,000 / (1 + 0.02)^2 = $49.02 + $48.06 + $961.17 = $1,058.25.

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