Question

EXIT The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value...

EXIT

The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value falls from 8 percent to 7 percent. Which of the following is true of the value of the bond? (Round the answer to two decimal places.)

A. The present value of the bond at 7 percent is $463.19.

B. The maturity value of the bond at 7 percent is $508.34.

C. The present value of the bond at 7 percent is $508.34.

D. The maturity value of the bond at 8 percent is $508.34.

E. The present value of the bond at 8 percent is $508.34.

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Answer #1

Present Value of the Bond if the interest rate falls from 8 percent to 7 percent

The Present Value of a Zero-Coupon Bond is the Present Value of the Face Value of the Bond

Face Value = $1,000

Yield to Maturity (YTM) of the Bond = 7%

Number of periods = 10 Years

The Present Value of the Bond = Face Value / (1 +YTM)n

= $1,000 / (1 + 0.07)10

= $1,000 / 1.96715

= $508.34

Therefore, the answer would be “(C). The present value of the bond at 7 percent is $508.34”

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