Question

A zero-coupon bond pays no annual coupon interest payments. When it matures at the end of 10 years it pays out $1,000. If investors wish to earn 6.5% per year on this bond investment, what is the current price of the bond?

Answer 1

Answer:

$532.73

Explanation:

we need to determine the present value of the bond:

Present value = future value / (1 + r)ⁿ

where:

• future value (FV) = $1,000
• r = 6.5%
• n = 10 years

PV = $1,000 / (1 + 6.5%)¹⁰ = $1,000 / 1.065¹⁰ = $1,000 / 1.8771 = $532.73

Answer 2

Answer: $532.73 (2 d.p)

Explanation:

Price of a zero coupon bond = M / (1 + r)^n

M is the price at maturity which is = $1000

r is the required rate of interest which is = 6.5%

n is number of years until maturity which is 10 years.

Price is therefore:

=1000/(1+0.065)^10

=1000/1.065^10

=532.726

=$532.73 (2 d.p)

NB: 6.5% is

6.5/100 = 0.065