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Sarah Allen is interested in buying a five-year zero coupon bond with a face value of...

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?

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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
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