The price of a two-year bond is 101.78 and the correct option is C.
Given that a 9% annual coupon and a yield to maturity of 8%.
Simple yield is the amount of interest received by a bond issuer divided by the current market price of the associated bond.
Implicit Face value, FV=$100
Time, N=2 years
Coupon, C=(9/100)×$100=9
The yield of maturity, r=8%=0.08
Now, we will find the bond price using the formula
Price of bond = C× [1-{1/ (1+r)ⁿ}/r] +M/ (1+r)ⁿ
Substitute the values in this formula, we get
Price of bond=9×[1-{1/(1+0.08)²}/0.08]+100/(1+0.08)²
Price of bond=9×[1-{1/(1.08)²}/0.08]+100/(1.08)²
Price of bond=9×[1-{1/1.1664}/0.08]+100/1.1664
Price of bond=9×[(1-0.857)/0.08]+85.73
Price of bond=9×[0.143/0.08]+85.73
Price of bond=9×1.7875+85.73
Price of bond=16.0875+85.73
Price of bond=101.78
Hence, the price of a two-year bond with a 9% annual coupon and a yield to maturity of 8% is 101.78.
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