Question

Consider the following zero-coupon yield curve on default free securities: Maturity Annual Yield to Maturity 1 Year 2.30% 2 Years 3.00% 3 Years 4.00% If all bonds are risk free and there is no arbitrage, what is the price of a $1,000 Face Value 3-year coupon bond with a 3.5% annual coupon rate paid annually? Group of answer choices

-$987.32.
-$986.12.
-$898.00.
-$1,001.36.

Answer 1

To calculate the price of the bond, we need to discount the future cash flows using the yield curve. The price of the $1,000 face value 3-year coupon bond with a 3.5% annual coupon rate paid annually is approximately -$986.12.

option b is the correct

Step-by-step explanation:

To calculate the price of a $1,000 face value 3-year coupon bond with a 3.5% annual coupon rate paid annually, we need to discount the future cash flows of the bond using the given yield curve. The coupon payment is $35 per year for 3 years, and the face value is $1,000. Using the yields to maturity on the zero-coupon bonds, we can calculate the present value of the cash flows using the formula:

PV = Coupon Payment / (1 + Yield) + Coupon Payment / (1 + Yield)² + Coupon Payment / (1 + Yield)³ + Face Value / (1 + Yield)³

Substituting the coupon payment, face value, and yields to maturity, we find that the price of the bond is approximately -$986.12.