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7 October, 21:06

Zero coupon bonds: Diane Carter is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market interest rate for similar investments is 9 percent. Assume annual coupon payments. What is the current value of this bond?

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  1. 8 October, 00:48
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    The answer is $649.93

    Explanation:

    price = M / (1 + i) ^n

    M = 1000

    i = 0.09

    n = 5

    Therefore value of the zero coupon bond is 1000 / 1.09^5 = $649.93
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