Suppose That All Investors Expect That Interest Rates for the 4

question 31

Multiple Choice

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lc}\text { Year } & \text { Forward Interest Rate } \\0 & \text { (today) } 3\% \\1 & 4\% \\2 & 5\% \\3 & 6\%\end{array}$
What is the price of a 2-year maturity bond with a 5% coupon rate paid annually? (Par value = $1,000.)

• A) $1,092.97
• B) $1,054.24
• C) $1,028.50
• D) $1,073.34
• E) None of the options are correct.