Question

On May 1, 2021, Joe purchased $290,000 in zero-coupon bonds that mature on May 1, 2041. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 9%. Interest compounds annually. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided. Enter your answer rounded to the nearest whole dollar.)

Required: Calculate the price Joe paid for the bonds.

Answer 1

Answer:

$51,744.70

Explanation:

The computation of the price paid for the bond is shown below:

= Purchase value of zero-coupon bonds × present value factor

where,

Purchase value of zero-coupon bonds = $290,000

And, the present value factor would be

= 1 ÷ (1 + rate)^years  

= 1 ÷ (1 + 0.09)^20

= 0.17843

So, the price paid for the bonds would be

= $290,000 × 0.17843

= $51,744.70