What is the fair price for a bond paying annual coupons at 5% and maturing in 5 years.

What is the fair price for a bond paying annual coupons at 5% and maturing in 5 years.

Assume par value of $100 and the yield curve is flat at 6%.
A . $104.33
B . $95.79
C . $100.00
D . $94.73

View Answer

Answer: B

Explanation:

The coupon payments can be considered an annuity which can be valued using the formula for the PV of annuities= annuity. Therefore the value of the five coupon payments is 5 * ((1-1/(1.06^5))/0.06) = $21.06 Similarly the principal payment at the end of 5 years can be valued as 100/1.065 = $74.73 Therefore the total value of the bond today is $95.79