Question

A zero-coupon bond is a security that pays no interest, and is therefore bought at a...

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.

Homework Answers

Answer #1

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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