Suppose that all investors expect that interest rates for the 4 years will be as follows:

Year Forward Interest rate

1 ( Today )5%

2 7%

3 9%

4 10%

What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)

Answers:

$1,000

$1,092

$1,073