A zero-coupon bond is a security that pays no interest, and is
therefore bought at a substantial discount from its face value. If
the interest rate is 8% with annual compounding how much would you
pay today for a zero-coupon bond with a face value of $2,500 that
matures in 6 years?
Please round your answer to the nearest cent.
Amount that is willing to be paid is present value of bond that is $ 1,575.42
Working:
| a. | Present value of $ 1 to be received in 6 years | = | (1+i)^-n | Where, | ||||||||
| = | (1+0.08)^-6 | i | 8% | |||||||||
| = | 0.63017 | n | 6 | |||||||||
| b. | Price of zero coupon bond | = | Face Value x Present Value of $ 1 to be received at 6 years | |||||||||
| = | $ 2,500.00 | x | 0.63017 | |||||||||
| = | $ 1,575.42 | |||||||||||
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