Question

A zero-coupon bond has a yield to maturity of 11% and a par value of $1,000. If the bond matures in 27 years, the bond should sell for a price of _______ today.

Answer 1

The bond should sell for a price of $59.74 today.

Step-by-step explanation:

Zero Coupon Bond is a bond which does not offer any interest payment but it is issued at deep discount amount from the face value of the bond.

Price of Zero Coupon Bond =
`(F)/(( 1 + r )^t)`

F = Face / Par Value of Bond = $1,000

r = rate of interest = 11%

n = number of years = 27 years

Price of Bond =
`(1000)/(( 1 + 0.11)^27)`

Price of Bond = $59.74

As Zero coupon bond does not offer any discount so, it is valued much below the par value.