The following information relates to Questions
$\begin{array} { l c }
\text { Time Period } & \text { Forward Rate } \
\hline \text { "0y1y" } & 0.80 \% \
\text { "1y1y" } & 1.12 \% \
\text { "2y1y" } & 3.94 \% \
\text { "3yly" } & 3.28 \% \
\text { "4yly" } & 3.14 \% \
\hline
\end{array}$
All rates are annual rates stated for a periodicity of one (effective annual rates).
-The value per 100 of par value of a two-year, 3.5% coupon bond, with interest payments paid annually, is closest to:
A) 101.58.
B) 105.01.
C) 105.82.

Question

The following information relates to Questions 
 $\begin{array} { l c } 
\text { Time Period } & \text { Forward Rate } \
\hline \text { "0y1y" } & 0.80 \% \
\text { "1y1y" } & 1.12 \% \
\text { "2y1y" } & 3.94 \% \
\text { "3yly" } & 3.28 \% \
\text { "4yly" } & 3.14 \% \
\hline
\end{array}$ 
All rates are annual rates stated for a periodicity of one (effective annual rates).
-The value per 100 of par value of a two-year, 3.5% coupon bond, with interest payments paid annually, is closest to:
A) 101.58.
B) 105.01.
C) 105.82.

Quizplus · Accepted Answer

The value of a bond can be calculated by discounting its future cash flows (coupon payments and the principal repayment) back to the present using the appropriate discount rates. For a two-year, 3.5% coupon bond with annual interest payments, the cash flows are $3.5 in year 1 and $103.5 in year 2 (the final coupon payment plus the principal repayment). The appropriate discount rates are the forward rates for the respective periods: 0.80% for the first year and 1.12% for the second year. The present value (PV) of these cash flows can be calculated as follows:$$ PV = \frac{3.5}{(1 + 0.008)} + \frac{103.5}{(1 + 0.0112)^2} $$$$ PV = \frac{3.5}{1.008} + \frac{103.5}{1.0112^2} $$$$ PV = 3.472 + 101.528 \approx 105.00 $$Therefore, the value per 100 of par value of the bond is closest to 105.01.

The Following Information Relates to Questions All Rates Are Annual Rates Stated for a Periodicity of }