Calcuate the price of a 3-year maturity, $100 par bond with a 4% coupon paid annually using the spot curve below

Finance Dec 24, 2020

Calcuate the price of a 3-year maturity, $100 par bond with a 4% coupon paid annually using the spot curve below. 1y spot = 6.186% 2y spot = 5.196% 3y spot = 5.637% $95.605 $98.671 $99.216 $113.541

Expert Solution

First we have to calculate present value of bond using the given spot rates as follows:

= 4/(1+6.186%) + 4/(1+5.196%)^2 + 104/(1+5.637%)^3

= 3.767 + 3.615 + 88.223

= 95.605

Hence, bond price is USD 95.605.

Given the bond price, we can calculate YTM of the bond as follows:

Using calculator,

PV = -95.605

PMT = 4

FV = 100

N = 3

CPT I/Y = 5.63%.

Now, using above YTM we can calculate bond price.

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