Question

The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that the bond compounds interest semiannually. What will be the current market price of these bonds if the yield to maturity for similar investments in the market is 6.75 percent? (Round your answer to the nearest dollar.)

A) $684
B) $860
C) $515
D) $604

Answer 1

The current market price of the 10-year zero coupon bond is $515.

Step-by-step explanation:

The current market price of the 10-year zero coupon bond can be calculated using the present value formula:

Price = Face Value / (1 + Yield/2)^(2 x Number of Years)

In this case, the face value is $1,000, the yield to maturity is 6.75%, and the bond compounds interest semiannually. The number of years is 10 years. Plugging in these values into the formula:

Price = $1,000 / (1 + 0.0675/2)^(2 x 10) = $515 (rounded to the nearest dollar).