Question

You paid $713 last year for a zero-coupon bond that promised to pay you $1,000 at the end of 5 years. Rather than hold it for the remaining four years, you have decided to sell it today. The prevailing effective annual interest rate is 9%. To the nearest dollar, what price do you expect to get for your bond?

Answer 1

The bond today will be valued at 708.4252

Step-by-step explanation:

The price for the bond will be the present value of 1,000 at the current market rate of 9%

We will use the present value of a lump sum to calculate this:

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 1,000 dollars

time 4 years

rate 9% = 9/100 = 0.09

`(1000)/((1 + 0.09)^(4) ) = PV`

PV $708.4252

This will be the expected market value for the bond.