Question

Shana Norris wants to buy five-year zero coupon bonds with a face value of $1,000. Her opportunity cost is 8.5 percent. Assuming annual compounding, what would be the current market price of these bonds? (Round your answer to the nearest dollar.)

A) $1,023
B) $665
C) $890
D) $1,113

Answer 1

The current market price of these zero coupon bonds would be approximately $679.

Step-by-step explanation:

To calculate the current market price of zero coupon bonds, you'll need to use the formula:

Price = Face Value / (1 + interest rate)number of years

In this case, the face value is $1,000, the interest rate is 8.5% (0.085), and the number of years is 5. Plugging these values into the formula:

Price = $1,000 / (1 + 0.085)5 = $1,000 / (1.085)5 = $1,000 / 1.47103 = $679.02

Rounding this to the nearest dollar, the current market price of these zero coupon bonds would be approximately $679.