What is the price of a 2-year maturity bond with a 5% coupon rate paid annually? (Par value = $1,000.) Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lr}
& \text { Forward } \
\text { Year } & \text { Interest Rate } \
\hline 0 & \text { (today) } 3 \% \
1 & 4 \% \
2 & 5 \% \
3 & 6 \%
\end{array}$
A) $1,092.97
B) $1,054.24
C) $1,028.51
D) $1,073.34
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The bond price is calculated by discounting the cash flows (coupon payments and par value) at the expected interest rates. The cash flows are $50 in year 1 and $1,050 in year 2. The present value of these cash flows is $1,028.51.

What Is the Price of a 2-Year Maturity Bond with a 5