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Hi everyone, Im working on my CFA prep and bumped into a question. It's not tricky at all at first sight but now I have some doubt.. can anyone help me there? The question is as follows:
Given the following spot and forward rates:
Current 1 year spot rate (S1) is 5%
1y1y is 7.63%
2y1y is 12.18%
3y1y is 15.5%
The value of a 4 year 10% annually pay, 1000 USD par value bond is closest to:
The solution said answer is B, but I actually had two different answers using different methods.
If I compute the spot rate of 4 year bond, which should be the YMT of the bond first, which is S4=[(1+S1)*(1+1y1y)*(1+2y1y)*(1+3y1y)]^(1/4)-1, S4 will be 10.134% and the PV of the bond will be near to 996.
If I adopt the cash flow method and add up PV of coupons & FV of the bond, the answer will be 1009.
But both methods seem correct to me. I don't know what went wrong??
Thanks in advance for your thoughts!