You are given the following information with respect to a bond:
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.
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.
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.