An investor considers the purchase of a 2-year bond with a 5% coupon rate, with interest paid annually. Assuming the sequence of spot rates shown below, the price of the bond is Closest to:
$\begin{array} { l c }
\hline \text { Time-to-Maturity } & \text { Spot Rates } \
\hline 1 \text { year } & 3 \% \
2 \text { years } & 4 \% \
\hline
\end{array}$
A) 101.93.
B) 102.85.
C) 105.81.

Question

An investor considers the purchase of a 2-year bond with a 5% coupon rate, with interest paid annually. Assuming the sequence of spot rates shown below, the price of the bond is Closest to:
$\begin{array} { l c } 
\hline \text { Time-to-Maturity } & \text { Spot Rates } \
\hline 1 \text { year } & 3 \% \
2 \text { years } & 4 \% \
\hline
\end{array}$
A) 101.93. 
B) 102.85.
C) 105.81.

Quizplus · Accepted Answer

The bond price is calculated by discounting each cash flow by the corresponding spot rate. The bond pays $5 in year 1 and $105 in year 2. The price is: $ \frac{5}{(1+0.03)} + \frac{105}{(1+0.04)^2} \approx 101.93 $.

An Investor Considers the Purchase of a 2-Year Bond with a 5