Question

A zero-coupon bond pays no interest payments to the bondholder. It has a $1,000 par value and matures in 5 years. What is the value of this bond if the market rate of interest on similar risk bonds is 10%?

Answer 1

$620.92

Step-by-step explanation:

Present Value Paid at Maturity = Face Value / (Market Rate/ 100) ^ Number Payments

Present Value of Interest Payments = Payment Value * (1 - (Market Rate / 100) ^ -Number Payments) / Number Payments)

Present Value of Bond = Present Value Paid at Maturity + Present Value of Interest Payments