Question

There are zero coupon bonds outstanding that have a YTM of 6.09 percent and mature in 17 years. The bonds have a par value of $10,000. If we assume semiannual compounding, what is the price of the bonds?

Answer 1

$3,606.49

Step-by-step explanation:

the price of a zero coupon bond = maturity value / (1 + i)ⁿ

• maturity value = $10,000
• i = 6.09% / 2 = 3.045% semiannual interest rate
• n = 17 years x 2 semiannual compounding = 34 periods

the price of a zero coupon bond = $10,000 / (1 + 3.045%)³⁴ = $10,000 / 1.03045³⁴ = $10,000 / 2.772779928 = $3,606.49

the formula we used to determine the market price of a zero coupon bond is basically the present value