The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}
\text { Maturity } & \text { Price } \
\text { (Years) } & \
1 & \$ 925.15 \
2 & 862.57 \
3 & 788.66 \
4 & 711.00
\end{array}$

You have purchased a 4-year maturity bond with a 9% coupon rate paid annually. The bond has a par value of $1,000. What would the price of the bond be one year from now if the implied forward rates stay the same?
A) $995.63
B) $1,108.88
C) $1,000.00
D) $1,042.78

Question

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}
\text { Maturity } & \text { Price } \
\text { (Years) } & \
1 & \$ 925.15 \
2 & 862.57 \
3 & 788.66 \
4 & 711.00
\end{array}$

You have purchased a 4-year maturity bond with a 9% coupon rate paid annually. The bond has a par value of $1,000. What would the price of the bond be one year from now if the implied forward rates stay the same?
A) $995.63
B) $1,108.88
C) $1,000.00
D) $1,042.78

Quizplus · Accepted Answer

The correct answer is A because the price of the bond one year from now would be $995.63 if the implied forward rates stay the same. This is because the bond has a 9% coupon rate, which means that it will pay $90 in interest each year. The present value of these interest payments is $90 / (1 + r)^1 + $90 / (1 + r)^2 + $90 / (1 + r)^3 + $1,000 / (1 + r)^4, where r is the implied forward rate. If the implied forward rates stay the same, then the price of the bond one year from now will be $90 / (1 + r)^1 + $90 / (1 + r)^2 + $90 / (1 + r)^3 + $1,000 / (1 + r)^4 * (1 + r)^1 = $995.63.