71.6k views
3 votes
A zero-coupon bond pays no annual coupon interest payments. When it matures at the end of 10 years it pays out $1,000. If investors wish to earn 6.5% per year on this bond investment, what is the current price of the bond?

2 Answers

1 vote

Answer: $532.73 (2 d.p)

Step-by-step explanation:

Price of a zero coupon bond = M / (1 + r)^n

M is the price at maturity which is = $1000

r is the required rate of interest which is = 6.5%

n is number of years until maturity which is 10 years.

Price is therefore:

=1000/(1+0.065)^10

=1000/1.065^10

=532.726

=$532.73 (2 d.p)

NB: 6.5% is

6.5/100 = 0.065

User Mlibby
by
7.7k points
2 votes

Answer:

$532.73

Step-by-step explanation:

we need to determine the present value of the bond:

Present value = future value / (1 + r)ⁿ

where:

  • future value (FV) = $1,000
  • r = 6.5%
  • n = 10 years

PV = $1,000 / (1 + 6.5%)¹⁰ = $1,000 / 1.065¹⁰ = $1,000 / 1.8771 = $532.73

User Peter DeGregorio
by
7.7k points

No related questions found

Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories