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**CFA Practice Question**

A firm issues a zero coupon bond with face value $100, and a maturity of 12 years. After 2 years, when the bond has 10 years left to maturity, the bond is downgraded resulting in a fall in its price, and the credit spread increasing to 1.24%. The U.S. Treasury 10 year spot rate is 5.2%. What is the price of the bond after the price drop?

A. $28.70

B. $67.56

C. $53.05

**Explanation:**Have to use semi-annual discounting, which is normally the standard. Lacking information to the contrary, first try semi-annual discounting in the exam, and if that does not work then try annual discounting.

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**User Contributed Comments**
2

User |
Comment |
---|---|

Luizillo |
n=20 i/y=(5.2+1.24)/2=4.22 fv=100 cpt pv=54.05 |

moneyguy |
almost, Luizillo: n=20 i/y=(5.2+1.24)/2 =======3.22 fv=100 cpt PV = 53.05 |