Question

A client has expressed interest in a ten-year zero coupon bonds with a face value of $1,000. His opportunity cost is 7 percent. Assuming annual compounding, what would be the current market price of these bonds? Round to the nearest dollar.

Answer 1

$508

Step-by-step explanation:

Data provided in the question:

Face value of the bonds = $1,000

Opportunity cost, r = 7% = 0.07

Time period of the coupon, n = 10 years

Now,

The Current price of these bonds from annual compounding

=
`\frac{\textup{Face value}}{(1+r)^n}`

or

=
`\frac{\$\textup{1,000}}{(1+0.07)^(10)}`

or

= $508.35

Hence,

the current market price of these bonds to nearest dollar is $508