You have a 1-year, 7 percent semi-annual coupon bond with a price of $985. If the 6-month T-bill rate is 5 percent, what is the one-year annualized theoretical spot rate? A) 8.6%. B) 6.5%. C) 7.4%. D) 8.0%.

A 985 = (35/1.025) + (1035/X^2) Solve for X and multiply by 2.

A?

the answer is A I don’t know how to figure it out

shouldn’t it be 985 = [35/(1 + 0.05)] + [1035/ (1 + x)^2] Find x and then mult by 2 Anyway’s the answer would still be A - Dinesh S

thanks all…the math is quite time consuming.

yancey they are trying to induce you in error by giving you the 6 mth rate which is not relevant because the bond is 1y - it’s yield will be the 1 year spot rate to use your calc pv=-985 pmt=75/2=35 fv=1000 n=2 cpt i/y then multiply the rate with 2 because its semiannual it should take you 30 seconds or less

thank you florinpop, that is very helpful. I just have one small question. Based on your calculations, N = 2 because it is a one year annualized spot rate (but with semi annual coupon)…is that correct? yancey

yes