Question

The 4-year par value of 1000 bond with mature at 1200 and has annual coupons of 25 earns spot rates s1=3%, s2=2%, s3=1%, and s4=5%. Find the price of the bond and determine its annual yield rate

Answer 1

The Price of Bond (V) = $V=\frac{C_i}{(1+s_1)}+\frac{C_2}{(1+s_2)^2}+\frac{C_3}{(1+s_3)^3}+\frac{C_4}{(1+s_4)^4}+\frac{M.V}{(1+s_4)^4}$

Year	Coupon	Spot Rate
1	25	3%	24.27184	25/1.03
2	25	2%	24.02922	25/1.02^2
3	25	1%	24.26475	25/1.01^3
4	25	5%	21	25/1.05^4
4	1200	5%	987	1200/1.05^4
		Value of Bond	1080.376	SUM(D3:D7)

Annual Yield of bond investment: required rate of return to make net bond value at zero.

А 1 Year o Cash flow -1080.376 25 25 N w 1225 YTM 4.89% IRR(B2:B6)