A 3-year bond with face value 100, annual coupon 5%, yields 5%. What is its price?

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Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Multiple Choice

A 3-year bond with face value 100, annual coupon 5%, yields 5%. What is its price?

Explanation:
The price of a bond is found by discounting all future cash flows at the yield to maturity. This bond pays a 5% coupon on a 100 face value, so it provides 5 every year for three years and 100 at the end of year three. Discounting at 5% per year: - PV of coupons = 5/1.05 + 5/1.05^2 + 5/1.05^3 ≈ 13.62 - PV of principal = 100/1.05^3 ≈ 86.38 Total price ≈ 13.62 + 86.38 = 100. Since the coupon rate equals the yield, the bond trades at its face value. The price is 100.

The price of a bond is found by discounting all future cash flows at the yield to maturity. This bond pays a 5% coupon on a 100 face value, so it provides 5 every year for three years and 100 at the end of year three. Discounting at 5% per year:

  • PV of coupons = 5/1.05 + 5/1.05^2 + 5/1.05^3 ≈ 13.62
  • PV of principal = 100/1.05^3 ≈ 86.38

Total price ≈ 13.62 + 86.38 = 100.

Since the coupon rate equals the yield, the bond trades at its face value. The price is 100.

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