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 disco

Question

1 year ago

6

unt rate is 11%.?

1 answer:

zvonat [6] · Answer 1 · 2024-01-22T19:58:12+03:00

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

<h3>What is a zero-coupon bond?</h3>

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.

Second, add 1 to 0.11 to get 1.11.

Third, raise 1.11 to the seventh power to get 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.

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

Know more about zero-coupon bonds here:

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