Question

Sarah Allen is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market interest rate for similar investments is 9.5 percent. Assume annual coupon payments. What is the current value of this bond?

Answer #1

Value of the Zero Coupon Bond = | $1,000 | |||

Zero Coupon bonds are always sell at discount price because they cannot pay interest on this type of bonds | ||||

Interest rate on similar type of Bonds = | 9.50% | |||

There is only one time cash flow in this tyoe of bon and that is at maturity of year | ||||

CALCULATION OF THE CUURENT VALUE OF THE BONDS | ||||

Year | Cash inflow (A) | PVF of $ 1 @ 9.5% (B) | Present Value (A XB) | |

1 | $0 | 0.91324 | $0.00 | |

2 | $0 | 0.83401 | $0.00 | |

3 | $0 | 0.76165 | $0.00 | |

4 | $0 | 0.69557 | $0.00 | |

5 | $5,000 | 0.63523 | $3,176.14 | |

Total | $3,176.14 | |||

Answer = Value of the Bonds = $ 3,176.14 |

PLEASE SHOW HOW TO SOLVE THE PROBLEMS! Will give you a good
rating if done properly :)
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