The value of the bond is simply the present value of discounted future cash flows, using the appropriate spot rate as the discount rate for each cash flow. The coupon payment of the bond is $80 (0.08 × 1,000) and the face value is $1,000. Hence, bond price of 1,100= 80/(1.05)+ 80/(1.06)2 + 1,080/(1 + 3-year spot rate)3. Using the yx key on our calculator, we can solve for the 3-year spot rate of 4.27%.
