Chartered Financial Analyst (CFA) Practice Exam Level 2

Disable ads (and more) with a membership for a one time $4.99 payment

Prepare for the CFA Exam Level 2 with comprehensive quizzes and resources. Test your knowledge with challenging questions that reflect the exam format and content. Build confidence and achieve your career goals in finance!

Practice this question and more.

What formula represents the future value of a bond future considering the future value coupon?

F0 = (S0 - PVC) * (1 + Rf)^T
F0 = S0 * (1 + Rf)^T - FVC
Vt = PV * (Ft - F0)
Vt = (Ft - F0) / (1 + Rf)^T

The correct answer is: F0 = S0 * (1 + Rf)^T - FVC

The chosen answer correctly represents the future value of a bond future while considering the future value of the coupon payments. To understand this, we need to dissect the components of the formula. The formula takes into account the current bond price, denoted as S0, and applies the future value factor (1 + Rf)^T to project this current price into the future over a period T at the risk-free rate (Rf). This part of the formula essentially compounds the current price to account for the time value of money. Furthermore, the term FVC, which stands for the future value of the coupon payments, is subtracted from the compounded future price. This subtraction provides the adjustment for the cash flows associated with the bond, reflecting that these coupon payments will also contribute to the total value realized at maturity. Thus, this formula captures the essence of calculating what a bond future is worth at a point in the future by consolidating both the appreciation of the bond's current value and the future value created by the coupon payments. The approach effectively integrates key concepts of the time value of money and cash flow consideration, which are fundamental in bond valuation.