Question

A 16-year, $1,000 par value zero-coupon rate bond is to be issued to yield 6 percent.

Required:
a. What should be the initial price of the bond?
b. If immediately upon issue, interest rates dropped to 5 percent, what would be the value of the zero-coupon rate bond?
c. If immediately upon issue, interest rates increased to 10 percent, what would be the value of the zero-coupon rate bond?

Answer 1

a) $393.65

b) $458.11

c) $217.63

Step-by-step explanation:

Given data:

16-year ( n )

$1000 par value ( FV )

6% ( R )

A) determine the initial price of the bond

= FV / ( 1 + R ) ^ n

= 1000 / ( 1.06 ) ^ 16

= 1000 / 2.5403 = $393.65

B ) when interest rate drops to 5% determine the value of the zero-coupon rate of bond

= FV / ( 1 + R ) ^n

= 1000 / ( 1.05 ) ^ 16

= 1000 / 2.1829 = $458.11

C ) when interest rate increases to 10% determine the value of the zero-coupon rate of bond

= Fv / ( 1 + R ) ^ n

= 1000 / ( 1.1 ) ^ 16

= 1000 / 4.5950 = $217.63