Question

A 10-year, $1,000 par value zero-coupon rate bond is to be issued to yield 7 percent. Calculate your final answer using the formula and financial calculator methods.
Required:
a. What should be the initial price of the bond?
b. If immediately upon issue, interest rates dropped to 6 percent, what would be the value of the zero-coupon rate bond?
c. If immediately upon issue, interest rates increased to 10 percent, what would be the value of the zero-coupon rate bond?

Answer 1

Answer:

At 7% price of bond is $508.35

at 6% price of the bond is $558.39

at 10% price of the bond is $385.54

Explanation:

The present value formula given below is very useful here:

PV=FV*(1+r)^-N

fv=$1000

r=7%

N=10

PV=1000*(1+0.07)^-10

PV=1000*(1.07)^-10

PV=$508.35

at 6% rate of return the price of the bond is computed as follows

fv=$1000

r=6%

N=10

PV=1000*(1+0.06)^-10

PV=1000*(1.06)^-10

PV=$558.39

at 10% rate of return the price of the bond is computed as follows

fv=$1000

r=10%

N=10

PV=1000*(1+0.1)^-10

PV=1000*(1.1)^-10

PV=$385.54