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 |
|||||

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