Question

a) Describe the key feature of a zero-coupon bond. (1 mark) b) “The price of a zero coupon bond should be equal to its face value.” True or false? Explain. c) “The yield to maturity of a discount bond is greater than its coupon rate.” True or false? Explain. d) You just purchased a 12-year semi-annual coupon bond with a par value of $1,000 and a coupon rate of 7%. The nominal yield to maturity is 6% per annum. Calculate the market price of the bond. e) Three years later, immediately after receiving the sixth coupon payment, you sell the bond to your best friend. Your best friend’s nominal yield to maturity is 8% per annum. Calculate the price paid by your best friend.

Answer 1

a]	The key feature of a zero-discount bond is that it does not pay
	interest and is issued at a very low price, which price is the
	maturity value of the bond discounted at the market rate.
b]	FALSE
c]	TRUE
d]	Price of the bond = 1000/1.03^24+35*(1.03^24-1)/(0.03*1.03^24) =	$       1,084.68
e]	Price paid by the friend for the bond = 1000/1.04^18+35*(1.04^18-1)/(0.04*1.04^18) =	$ 936.70