Revision as of 17:54, 19 November 2023 by Admin (Created page with "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. The bond is sold at a price equal to its value. Calculate the annual effective yield rate for the bond i. <ul class="mw-excansopts"><li>8.1%</li><li>8.3%</li><li>8.5%</li><li>8.7%</li><li>8.9%</li></ul> {{soa...")
ABy Admin
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. The bond is sold at a price equal to its value.
Calculate the annual effective yield rate for the bond i.
- 8.1%
- 8.3%
- 8.5%
- 8.7%
- 8.9%
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.
ABy Admin
Nov 19'23
Solution: E.
Using spot rates, the value of the bond is:
60 /1.07 + 60 /1.082 + 1060 /1.093 = 926.03.
Using a calculator, the solution is 8.9%.
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.