Question

A zero-coupon bond has a yield to maturity of 8% and a par value of $1,000....

A zero-coupon bond has a yield to maturity of 8% and a par value of $1,000. If the bond matures in 8 years, at what price should the bond sell today?

a) $501.90

b) $555.28

c) $573.88

d) $540.30

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Homework Answers

Answer #1

Answer: Option (d)

Valuation of Zero Coupon Bond
Coupon Rate = 0
Time Period = 8 Years
Redemption Value = Twice par = 2*$1,000 = $ 2,000
Yield to Maturity = 8%
Par Value = $ 1,000
Price of Bond = Present Value of all future expected Reciepts
Price of Bond = Present Value of all Coupon payments + Present Value of Redemtion proceeds
Price of Bond = [0* PVAF(8%, 8 years)] + [$ 1,000 * PV(8%, 8yr)]
Price of Bond = 0 + [$ 1,000 * (1+0.08)-8]
Price of Bond = $ 1,000 / (1+0.08)8
Price of Bond = $ 1,000 * 0.5403
Price of Bond = $ 540.30

PVF = 1/(1+i)n

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