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A two year $100 bond has 2% coupons paid semi-annually (
A two year $100 bond has 2% coupons paid semi-annually (.01 per coupon). If the spot rates are 5.5=0.03, r1=0.035, r1.5=0.0374, r2=0.04 , find the price of the bond.
a. 96.25
b. 96.75
c. 97
d. 96
e. 96.50
Expert Solution
| Price of bond is the present value of cashflows | |||
| PV of cash flows | |||
| Year | Cash flows | Spot rate | PV @spot rate (Cash flow/((1+spot rate)^year) |
| 0.5 | $1 | 3.00% | $0.985 |
| 1 | $1 | 3.50% | $0.966 |
| 1.5 | $1 | 3.74% | $0.946 |
| 2 | $101 | 4.00% | $93.380 |
| Price of Bond | $96.3 | ||
| Option A is correct - 96.25 is the price of bond |
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