QBank Question-- Corporate Bond Price?

following, corporate, structure, government, equivalent

I'm not sure where they are getting this formula for calculating the bond price? Can anyone direct me to a LOS or section in the CFA/schweser curriculum?

Thanks!

Suppose that a corporate bond and a government bond have equivalent characteristics. They both have a coupon rate of 6% paid annually and have two years remaining to maturity. Assuming a flat government term structure of 7% which of the following is a possible price of the corporate bond?

A) 98.19.

B) 97.76.

C) 101.35.

Your answer: C was incorrect. The correct answer was B) 97.76.

Since the corporate bond involves credit risk and the government bond doesn't. The corporate bond price has to be less than the government bond price which is computed as follows:

Government Bond Price = 6 / 1.07 + 106 / 1.072 = 98.19

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