Question

What is the current value of a zero-coupon bond that pays a face value of $1,000 at maturity in 7 years if the appropriate discount rate is 11%.?

Answer 1

The current value of a zero-coupon bond is $481.658412.

What is a zero-coupon bond?

• A zero coupon bond (also known as a discount bond or deep discount bond) is one in which the face value is repaid at maturity.
• That definition assumes that money has a positive time value.
• It does not make periodic interest payments or has so-called coupons, hence the term zero coupon bond.
• When the bond matures, the investor receives the par (or face) value.
• Zero-coupon bonds include US Treasury bills, US savings bonds, long-term zero-coupon bonds, and any type of coupon bond that has had its coupons removed.
• The terms zero coupon and deep discount bonds are used interchangeably.

To find the current value of a zero-coupon bond:

First, divide 11 percent by 100 to get 0.11.

• 11%/100 = 0.11

Second, add 1 to 0.11 to get 1.11.

• 1 + 0.11 = 1.11

Third, raise 1.11 to the seventh power to get 2.07616015.

• 1.11⁷ = 2.07616015

Divide the face value of $1,000 by 1.2653 to find that the price to pay for the zero-coupon bond is $481.658412.

• $1,000/1.2653 = $481.658412

Therefore, the current value of a zero-coupon bond is $481.658412.

Know more about zero-coupon bonds here:

brainly.com/question/19052418

#SPJ4