Question

Calculate the price of a zero coupon bond that matures in five years if the market interest rate is 7.50 percent. (assume semi-annual compounding and $1,000 par value.)

Answer 1

   The price of a zero coupon bond is $ 692.02

  The price of a zero coupon bond is calculated by the compound interest formula as follows :

    FV= $1,000

    PV=?

    n= 5 years

    i= 7.50 percent

               FV= PV*(1+ i)ⁿ

           Then :    PV=  FV/(1+ i)ⁿ

                          PV= $1,000/( 1 + 0.075/2)^(5*2)

                         PV= $692.02

     The price of a zero coupon bond is $ 692.02