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.

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.