Question

Diane Carter is interested in buying a five-year zero coupon bond whose face value is $1,000. She understands that the market interest rate for similar investments is 9 percent. Assume annual coupon payments. What is the current value of this bond

Answer 1

$649.93

Step-by-step explanation:

Given that:

Diane Carter is interested in buying a five-year zero coupon bond whose face value is $1,000.

This implies that

Face value = $1,000 and the maturity time for the bond = 5 years

Market interest rate = 9%

Note that :

For a zero coupon bond ; there is no payment for coupons. Thus , it is just issued at a discount rate.

Hence , the current value of this bond is the Present Value of the bond;

Using Excel function: (=PV(rate,nper,pmt,fv,type)

The Present value of bond is $649.93