While most bonds pay a coupon (regularly scheduled interest payments), some bond
ID: 2618932 • Letter: W
Question
While most bonds pay a coupon (regularly scheduled interest payments), some bonds do not. These zero coupon bonds pay interest only when the bond matures. Pricing these bonds is different, but easier, than pricing coupon bonds.
You want to purchase a zero coupon bond with a par value of $10,000 and 27 years to maturity. The annual yield to maturity on this bond is 4.9 percent with semi-annual compounding.
What is the price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Price $
Explanation / Answer
Price of the Bond = $ 2,706.16
Par Value = $10,000
Years to Maturity = 27 Years x 2 = 54 Years [Since, semiannual compounding]
Yield to Maturity = 4.90% / 2 = 2.45% [Since, semiannual compounding]
Price of the Zero Coupon Bond = Present Value of the Par Value of the Bond
= $10,000 x [PVIF 2.45%, 54 Years ]
= $10,000 x 0.270616338
= $2,706.163376
= $2,706.16 [Rounded to 2 decimal places]
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.