A government bond issued in Germany has a coupon rate of 5%,a face value of 100 euros,and matures in five years.The bond pays annual interest payments.Calculate the price of the bond (in euros)if the yield to maturity is 3.5%.

Question

Quizplus · Accepted Answer

Using the formula for present value of a bond:
PV=C/(1+r)^1 + C/(1+r)^2 + C/(1+r)^3 + C/(1+r)^4 + (C+FV)/(1+r)^5
Where C is the coupon payment, r is the yield to maturity, and FV is the face value of the bond.
Plugging in the values: 
PV=5/(1+0.035)^1 + 5/(1+0.035)^2 + 5/(1+0.035)^3 + 5/(1+0.035)^4 + (5+100)/(1+0.035)^5
PV=20.79+20.16+19.55+18.96+80.30
PV=159.76
Therefore, the price of the bond is 106.77 euros. So, the best choice is B.

A Government Bond Issued in Germany Has a Coupon Rate