Question

Using the following spot rates, what is the dollar price of a 3-year bond with a par value of $1000 that pays a fixed annual coupon of 6%?

Year 1: 4.5%

Year 2: 5.0%

Year 3: 6.0%

Answer 1

We Calculate dollar price of the bond using discounted cash flow tecnique as shown in the below table

	Cash Flows
Particulars	Interest	Principal	Total	Discount Rate	Discounting Factor	Present Value
Year-1	60	-	60	4.50%	1/(1.045)	57.42
Year-2	60	-	60	5%	1/{(1.045)(1.05)}	54.68
Year-3	60	1,000	1,060	6%	1/{(1.045)(1.05)(1.06)}	911.37

In the above table we are discounting all the cash flows using the yearly rates given in the question

Hence the Present value of the bond is 57.42+54.68+911.37 = $1023