Question

To fund a project, a company will issue 6-year zero coupon bonds with a face value of $1,000. Assuming annual coupons to be the norm, what will be the price of these bonds if the appropriate yield is 11.9 percent p.a.? (Round to the nearest dollar; do not use $ sign or commas)

Answer 1

The bond's price is calculated using the present value formula, adjusting for a yield of 11.9% over 6 years and rounding to the nearest dollar. Interest rate fluctuations affect bond prices inversely.

Step-by-step explanation:

To determine the price of a 6-year zero coupon bond with a face value of $1,000 and a yield of 11.9 percent per annum, we use the present value formula. The price of the bond is the present value of the single future cash flow, which is the redemption value to be received in 6 years. To calculate this, we use the formula:

Price = Face Value / (1 + Yield)Years

By substituting the values, we get:

Price = $1,000 / (1 + 0.119)6

Price = $1,000 / (1 + 0.119)^6 = $484.25 (rounded to the nearest dollar).

After the calculation, we round it to the nearest dollar, resulting in the bond price.