Question

You are purchasing a 20-year, zero-coupon bond. The annual yield to maturity is 9.80 percent and the face value is $1,000. What is the current market price? Assume (r) is bi-annual for compounding purposes in case of zero-coupon bond.

Answer 1

Price of the zero coupon bond is the present value of its face value.
bi-annual means compounding once every two years
Hence year
n = 20/2 =10
Interest = 9.80%* 2 =19.6
PV= FV/(1+r)^n
Where,
FV= Future Value
PV = Present Value
r = Interest rate
n= periods in number
= $1000/( 1+0.196)^10
=1000/5.98841
= $166.99
Price od the bond = $166.99