US CMA Part 2 · Chapter 3 · Question 7 of 15
A $1,000 face value bond pays a 6% annual coupon and matures in 5 years. If the market yield on similar bonds is 8%, what is the bond's price (rounded to the nearest dollar)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $920
Explanation
Price = PV of coupons + PV of face value. Annual coupon = 6% x $1,000 = $60. PV of coupons = $60 x 3.9927 (5-year annuity factor at 8%) = $239.56. PV of face = $1,000 x 0.6806 = $680.58. Price = $920.15, or about $920. The bond sells at a discount because its coupon rate is below the market yield.
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