Question

Compute the value of a consol bond that pays $4,000 interest per year.

What is the value of a zero-coupon bond that will pay $2,000 five years from now assuming that the interest rate is 7%?

Answer 1

Console bond is the bond that pays interest of fixed amount per year forever therefore we can calculate the price of consol bond as follows

Price of Consol bond= Price of perpetuities=A/(1-(1/(1+r))

where A= Annuity(Interest paid per year)

r=Interest rate

Price of CONSOL bond=4000/(1-(1/1.07))=$61142

Zero coupon bond is the bond that pays cashflow at the end of life of bond therefore if zero coupon bond pays A at maturity then price of that bond now is

=A/(1+r)^T where A= CF in future at maturity ; r= interest rate & T=life of bond

=2000/(1.07)^5=$1425.97

Price of Zero coupon bond is $1425.97