Question

A zero-coupon bond is a security that pays no interest, and is therefore bought at a substantial discount from its face value. If stated interest rates are 5% annually (with monthly compounding) how much would you pay today for a zero-coupon bond with a face value of $1,900 that matures in 8 years

Answer 1

Zero-cupon bond= $1,286

Step-by-step explanation:

Giving the following information:

Interest rate= 5%

Face value= $1,900

Years to maturity= 8 years

To calculate the value of the bond, we need to use the following formula:

Zero-cupon bond= [face value/(1+i)^n]

Zero-cupon bond= [1,900 / (1.05)^8]

Zero-cupon bond= $1,286