A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate that...

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Finance

A portfolio manager is considering the purchase of a bond with a5.5% coupon rate that pays interest annually and matures in threeyears. If the required rate of return on the bond is 5%, the priceof the bond per 100 of par value is closest to:
A) 101.36.
B) 98.65.
C) 106.43.
Please show the working process.

Answer & Explanation Solved by verified expert

3.7 Ratings (311 Votes)

A) 101.36.

Price of bond	=	=-pv(rate,nper,pmt,fv)
	=	$ 101.36

Where,

rate		5%
nper		3
pmt		$ 5.50
fv		$ 100.00

Alternatively,

Price of bond is the present value of cash flows from bond.

Present value of coupon			$ 5.50	x	2.723248	=	$ 14.98
Present value of Face value			$ 100.00	x	0.863838	=	$ 86.38

Present value of cash flows							$ 101.36

So, price of bond is		$ 101.36

Working:

Present value of annuity of 1		=	(1-(1+i)^-n)/i			Where,
		=	(1-(1+0.05)^-3)/0.05			i	5%
		=	2.723248			n	3

Present value of 1		=	1.05^-3
		=	0.863838

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Transcribed Image Text

A portfolio manager is considering the purchase of a bond with a5.5% coupon rate that pays interest annually and matures in threeyears. If the required rate of return on the bond is 5%, the priceof the bond per 100 of par value is closest to:A) 101.36.B) 98.65.C) 106.43.Please show the working process.