Question

A 14-year, $1,000 par value zero-coupon rate bond is to be issued to yield 7 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. What should be the initial price of the bond? (Assume annual compounding. Do not round intermediate calculations and round your answer to 2 decimal places.)

b. If immediately upon issue, interest rates dropped to 6 percent, what would be the value of the zero-coupon rate bond? (Assume annual compounding. Do not round intermediate calculations and round your answer to 2 decimal places.)
c. If immediately upon issue, interest rates increased to 9 percent, what would be the value of the zero-coupon rate bond? (Assume annual compounding. Do not round intermediate calculations and round your answer to 2 decimal places.)

Answer 1

Bond Par Value = $1,000

Time to Maturity = 14 years

Yield = 7%

a.

Initial Price of Bond,

Initial Value of Bond = 1000/(1.07)¹⁴

Initial Value of Bond = $387.82

Using TVM Calculator,

PV = [FV = 1000, T = 14, PMT = 0, I = 7%]

PV = $387.82

b.

If Yield drops to 6%

Value of Bond = 1000/(1.06)¹⁴

Value of Bond = $442.30

Using TVM Calculator,

PV = [FV = 1000, T = 14, PMT = 0, I = 6%]

PV = $442.30

c.

If Yield increases to 9%

Value of Bond = 1000/(1.09)¹⁴

Value of Bond = $299.25

Using TVM Calculator,

PV = [FV = 1000, T = 14, PMT = 0, I = %]

PV = $299.25

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