Question

1. A 20-year zero coupon bond is issued today to yield 4%. Find (1) the initial price of the bond; (2) the price of the bond if immediately after issue the market rate rose to 5%; (3) the price of the bond if immediately after issue the market rate dropped to 3%.

Answer 1

In case of zero coupon bond, interest is nil.
1) Calculation of bond price:
Bond price= Face value* present value factor at the rate of 4% for 20th year
=1000*0.45639=$456.39
2) Calculation of bond price:
Bond price= Face value* present value factor at the rate of 5% for 20th year
=1000*0.37689=$376.89
3) Calculation of bond price:
Bond price= Face value* present value factor at the rate of 3% for 20th year
=1000*0.55368=$553.68