You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face value of €1000. Bond B pays an annual 8% coupon, matures in three years, has a yield to maturity of 9%, and a face value of €1000. Calculate the price of Bond A.

Question

Quizplus · Accepted Answer

To calculate the price of Bond A, we need to use the formula for present value of a bond. 
PV = C/ (1+r)^1 + C/ (1+r)^2 + F/ (1+r)^2 
where PV is the present value, C is the annual coupon payment, r is the yield to maturity, and F is the face value.

Plugging in the values for Bond A: 
PV = 70/ (1+0.08)^1 + 70/ (1+0.08)^2 + 1000/ (1+0.08)^2 = € 982.17

Therefore, the best choice is B.

You Are Creating a Portfolio That Consists of the Following