An analyst collects the following spot rates, stated as annual BEYs:
- 6-month spot rate = 6%.
- 12-month spot rate = 6.5%.
- 18-month spot rate = 7%.
- 24-month spot rate = 7.5%.
Given only this information, the price of a 2-year, semiannual-pay, 10% coupon bond with a face value of $1,000 is closest to:
This question can be answered without calculations. Since the spot rates are less than the coupon rate, the price must be greater than par value, so C is the only possible correct choice.
This is a four-period bond with $50 cash flows each period. Divide each spot rate by two to get the semiannual rate.
PV1: N = 1; I/Y = 3.00; FV = $50; CPT → PV = $48.54 PV2: N = 2; I/Y = 3.25; FV = $50; CPT → PV = $46.90 PV3: N = 3; I/Y = 3.50; FV = $50; CPT → PV = $45.10 PV4: N = 4; I/Y = 3.75; FV = $1,050; CPT → PV = $906.23
why are the denominators not elevated by ^.5 , ^1 ^1.5 and ^2 ??? Thank you in advance