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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.

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