Question

Suppose that a two-year bond with a principal of $100 provides coupons at the rate of 6% per annum semiannually.

Suppose that the zero-rates are

Maturity (years)	Zero Rate (%)
0.5	5.0
1.0	5.8
1.5	6.4
2.0	6.8

What is the current theoretical price of the bond?

****Please show steps in a financial calculator****

Answer options are:

$98.39

102.45

97.23

101.27

99.81

Answer 1

Coupon payment=100*6%/2=3

Cash flows will be:
Coupon payment for t=0.5 to t=1.5 that is 3
and at t=2 cash flow will be principal+coupon that is 103

As you have to do it using financial calculator, you will have to do four times that is once for each cash flow

APPROACH 1

Step 1:
N=1
I/Y=5%/2
PMT=0
FV=-3
CPT PV=2.926829

Step 2:
N=2
I/Y=5.8%/2
PMT=0
FV=-3
CPT PV=2.833287

Step 3:
N=3
I/Y=6.4%/2
PMT=0
FV=-3
CPT PV=2.729494

Step 4:
N=4
I/Y=6.8%/2
PMT=0
FV=-103
CPT PV=90.106282

Step 5:
Price=Sum of all present values=2.926829+2.833287+2.729494+90.106282=98.39

APPROACH 2
=3/(1+5%/2)+3/(1+5.8%/2)^2+3/(1+6.4%/2)^3+103/(1+6.8%/2)^4