Question

A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate that pays interest annually and matures in three years. If the required rate of return on the bond is 5%, the price of the bond per 100 of par value is closest to:

A) 101.36.

B) 98.65.

C) 106.43.

Please show the working process.

Answer 1

A) 101.36.

Price of bond	=	=-pv(rate,nper,pmt,fv)
	=	$ 101.36
Where,
rate		5%
nper		3
pmt		$       5.50
fv		$ 100.00
Alternatively,
Price of bond is the present value of cash flows from bond.
Present value of coupon			$       5.50	x	2.723248	=	$    14.98
Present value of Face value			$ 100.00	x	0.863838	=	$    86.38
Present value of cash flows							$ 101.36
So, price of bond is		$ 101.36
Working:
Present value of annuity of 1		=	(1-(1+i)^-n)/i			Where,
		=	(1-(1+0.05)^-3)/0.05			i	5%
		=	2.723248			n	3
Present value of 1		=	1.05^-3
		=	0.863838