Question

Rally Ltd is planning to expand its specialty stores into five other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. If the yield is 6 percent and if similar coupon-bearing bonds pay coupons semiannually, what will be the price at which you will be willing to purchase these bonds? (Round to the nearest dollar.)

Select one:

A. $412

B. $417

C. $824

D. $834

Answer 1

Face Value of Zero-Coupon Bond= $1,000

Yield on Zero-Coupon Bond= 6%

Similar oupon-bearing bonds pay coupons semiannually,so

Semi-annual YTM = 6%/2 = 3%

Calculating the Price of Zero-Coupon Bond:-

where, n = no of periods = 15 years*12 = 30

Price of Zero-Coupon Bond is $412

So, the price at which you will be willing to purchase these bonds is $412

Option A

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