Question

Sunland Real Estate Company management is planning to fund a development project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding, what will be the price of these bonds if the appropriate discount rate is 9.8 percent?

Answer 1

$384.141

Step-by-step explanation:

Given the following :

Discount rate (r) = 9.8%

Semi-annual compounding

Face value = $1000

Period (t) = 10 years

Price of zero-coupon bond (P) :

Face value / ( 1 + r)^t

r =. 9.8%, compounded semianually

r = (9.8 / 100) = 0.098 / 2 = 0.049

Period (t) = 10 * 2 = 20

P = 1000 / (1 + 0.049)^20

P = 1000 / 1.049^20

P = 1000 / 2.6032

P = 384.14062

P = $384.141 ( 3 decimal places)