Independent solution

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)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=601.07+601.082+10601.093P=\frac{60}{1.07}+\frac{60}{1.08^2}+\frac{1060}{1.09^3}

Compute

Compute

The three present values total 926.03. Rounding to the alternatives gives 926.

P=926.03P=926.03

Answer

Answer

The calculation gives 926 for spot-rate bond valuation, matching published choice B.

P=926(B)\boxed{P=926\quad\text{(B)}}