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?
| 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 | ||||
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