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A zero-coupon bond is a security that pays no interest, and is therefore bought at a substantial discount from its face value. If the interest rate is 2% with annual compounding how much would you pay
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13 votes
13 votes
A zero-coupon bond is a security that pays no interest, and is therefore bought at a substantial discount from its face value. If the interest rate is 2% with annual compounding how much would you pay today for a zero-coupon bond with a face value of $900 that matures in 5 years?

User Pete Freitag
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1 Answer

28 votes
28 votes

Step-by-step explanation:

Given data

face value = $900

rate = 2%

time = 5 year

to find out

how much would you pay today

solution

we know present value formula that is

present value = face value × e^-rt

put all value here rt = 0.02(5) = 0.10

present value = face value × e^-rt

present value = $900 × e^-0.10

present value = $814.35

so pay today is $ 814.35

User Ahmed Hegazy
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2.7k points
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