Question

)In six months, your company plans to issue a 1.5 year zero coupon bond with a face value of $500,000 to finance a small acquisition. If the traditional expectations theory of the term structure is correct, and if the risk of your company's bonds is similar to that of the above bonds, what is the expected price of your company's bond at issue (i.s., in six months hence)

Answer 1

$441,495

Step-by-step explanation:

Since the information is incomplete, I looked for the missing part and found the attached information.

the current yield of a 1.5 years zero coupon bond = (100 / 89.9)¹/¹°⁵ - 1 = 0.0736 = 7.36%

the current yield of a 6 months zero coupon bond = (100 / 97.087)¹/⁰°⁵ - 1 = 0.0609 = 6.09%

now to calculate the future interest rate:

(1.0736²/1.0609) - 1 = 0.0865 = 8.65%

since we are told to determine the price of the bond:

(100/P)¹/¹°⁵ - 1 = 0.0865

(100/P)¹/¹°⁵ = 1.0865

100/P = 1.0865¹°⁵

100/P = 1.1325

100/1.1325 = P

P = 88.299

the expected price of the bond = 88.299% x $500,000 = $441,495