This Exam FM sample reference tests Spot-Rate Bond Valuation. The three present values total 926.03. Rounding to the alternatives gives 926. The result agrees with the published answer key, choice B.
How to solve this Spot-Rate Bond Valuation question
Setup
Setup
List the bond’s dated cash flows as 60, 60, and 1,060. Each maturity has its own spot rate, so a single yield-to-maturity annuity factor is not appropriate.
CF=(60,60,1060)
Model
Model
Discount the year-1 cash flow at 7%, the year-2 cash flow at the two-year spot rate of 8%, and the final cash flow at the three-year spot rate of 9%.
P=1.0760+1.08260+1.0931060
Compute
Compute
The three present values total 926.03. Rounding to the alternatives gives 926.
P=926.03
Answer
Answer
The calculation gives 926 for spot-rate bond valuation, matching published choice B.
P=926(B)
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