Question

Suppose you purchase a zero-coupon bond with a face value $1,000, maturing in 16 years, for $670. If the yield to maturity on the bond remains unchanged, what will be the price of the bond 5 years from now?

Question 15 options:

$759

$778

$797

$816

$835

Answer 1

Solution

Face value=1000

Market price =670

Therefore since it is a 0 coupon bond

Current market price= Face value/(1+YTM)^N

670=1000/(1+YTM)^16

1000/670=(1+YTM)^16

1+YTM= 1.025346

YTM=.025346

=2.5346%

Now to find the price of the bond after 5 years the price can be found by using the above formula

market price= Face value/(1+YTM)^N

Market price after 5 years= 1000/(1+.023456)^11

=759.32

Thus the correct answer is $759

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