A 10-year, $1,000 par value zero-coupon rate bond is to be issued to yield 7 per
ID: 2620472 • Letter: A
Question
A 10-year, $1,000 par value zero-coupon rate bond is to be issued to yield 7 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a. What should be the initial price of the bond? (Assume annual compounding. Do not round intermediate calculations and round your answer to 2 decimal places.)
b. If immediately upon issue, interest rates dropped to 6 percent, what would be the value of the zero-coupon rate bond? (Assume annual compounding. Do not round intermediate calculations and round your answer to 2 decimal places.)
c. If immediately upon issue, interest rates increased to 9 percent, what would be the value of the zero-coupon rate bond? (Assume annual compounding. Do not round intermediate calculations and round your answer to 2 decimal places.
Explanation / Answer
Answer a.
Par Value = $1,000
Time to Maturity = 10 years
Annual Yield = 7%
Initial Price = $1,000 * PV of $1 (7%, 10)
Initial Price = $1,000 / 1.07^10
Initial Price = $508.35
Answer b.
Par Value = $1,000
Time to Maturity = 10 years
Annual Yield = 6%
Initial Price = $1,000 * PV of $1 (6%, 10)
Initial Price = $1,000 / 1.06^10
Initial Price = $558.39
Answer c.
Par Value = $1,000
Time to Maturity = 10 years
Annual Yield = 9%
Initial Price = $1,000 * PV of $1 (9%, 10)
Initial Price = $1,000 / 1.09^10
Initial Price = $422.41
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