Question

Assume the​ zero-coupon yields on​ default-free securities are as summarized in the following​ table:

Maturity	1 year	2 years	3 years	4 years	5 years
​Zero-Coupon Yields	3.003.00​%	3.503.50​%	3.803.80​%	4.204.20​%	4.304.30​%

What is the price of a​ five-year, zero-coupon​ default-free security with a face value of $1,000. Round to the nearest cent.

Answer 1

Face value (f) = 1000. Rate/ yield = 4.304. Time to maturity = 5 years. formula for calculating zero coupon default free security is. = F / (1+r)t. = 1000/ (1+ 4.304%)5 = $810 zero coupon bond a bond that is issued at Deep discount to its face value but page no interest is zero coupon bond is a death security that doesn't pay interest but is treated at a deep discount rendering profit at maturity when the bond is redeemed for its full value hence there is a difference between zero coupon Bond and a regular Bond