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AAdmin
Nov 19'23

Exercise

You are given the following information with respect to a bond:

  • par value: 1000
  • term to maturity: 3 years
  • annual coupon rate: 6% payable annually

You are also given that the one, two, and three year annual spot interest rates are 7%, 8%, and 9% respectively.

Calculate the value of the bond.

  • 906
  • 926
  • 930
  • 950
  • 1000

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.

AAdmin
Nov 19'23

Solution: B.

Using spot rates, the value of the bond is: 60 /1.07 + 60 /1.083 + 1060 /1.093 = 926.03.

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.

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