Ruth Lewis is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market int

Question

3 years ago

14

Ruth Lewis is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market int

erest rate for similar investments is 11.5 percent. Assume annual coupon payments. What is the current value of this bond

Business

1 answer:

bearhunter [10] · Answer 1 · 2022-04-01T01:58:32+03:00

Answer:

Bond Price = $580.2640476 rounded off to $580.26

Explanation:

A zero coupon bond is a kind of bond that does not pay interest to the bond holder like other bonds. Instead it is offered at a discount price and pays the par value at maturity. The discount price is calculated using a certain rate which can also be called the implied interest rate on this zero coupon bond. The formula to calculate the price of the zero coupon bond is,

Bond Price = Par Value / (1 + r)^t

Where,

r is the interest rate or the discount rate
t is the number of periods to maturity

Bond Price = 1000 / (1+0.115)^5

Bond Price = $580.2640476 rounded off to $580.26