A 4-year bond with face value 100, annual coupon 6%, 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 4-year bond with face value 100, annual coupon 6%, yields 5%. What is its price?

Explanation:
The price reflects the present value of all remaining cash flows discounted at the yield to maturity. Here, the bond pays 6 each year for four years and redeems at 100 at year four. Discount each cash flow by 1.05 per year. PV of coupons = 6/(1.05) + 6/(1.05)^2 + 6/(1.05)^3 + 6/(1.05)^4 PV of redemption = 100/(1.05)^4 Numerically, this is 6*(0.952381 + 0.907029 + 0.862608 + 0.822702) + 82.2702 ≈ 21.268 + 82.270 ≈ 103.54. So the price is about 103.54, which rounds to 103.55. The higher coupon than yield pushes the price above 100.

The price reflects the present value of all remaining cash flows discounted at the yield to maturity. Here, the bond pays 6 each year for four years and redeems at 100 at year four. Discount each cash flow by 1.05 per year.

PV of coupons = 6/(1.05) + 6/(1.05)^2 + 6/(1.05)^3 + 6/(1.05)^4

PV of redemption = 100/(1.05)^4

Numerically, this is 6*(0.952381 + 0.907029 + 0.862608 + 0.822702) + 82.2702 ≈ 21.268 + 82.270 ≈ 103.54.

So the price is about 103.54, which rounds to 103.55. The higher coupon than yield pushes the price above 100.

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