Question

Crane Real Estate Company management is planning to fund a development project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding, what will be the price of these bonds if the appropriate discount rate is 13.0 percent

Answer 1

Answer:

Present value of zero coupon bond = $283

Explanation:

Provided that zero coupon bonds are to be issued.

In zero coupon bonds issue price is less than face value to meet the needs.

Interest rate = 13%

Duration = 10 years, Paid semiannually.

Thus periods = 20

Interest rate = $13 \times \frac{6}{12} = 6.5$

Therefore, Present value factor @6.5% for 20 periods = 0.283

Therefore, Value of bond today = $1,000 $\times$ 0.283 = $283