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6 July, 18:04

Your firm offers a 10-year, zero coupon bond (i. e., coupon rate is 0%). The yield to maturity is 8.8 percent. What is the current market price of a $1,000 face value bond?

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  1. 6 July, 20:25
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    The correct answer to the following question is $430.241

    Explanation:

    Zero coupon bond which are also know as pure discount bond, are those bonds which are issued at discount and makes no periodic interest payments to the bearer.

    Given information -

    Face value at maturity - $1000

    Yield to maturity - 8.8%

    Number of years till maturity - $10

    Current market price - maturity value / (1 + i) ^n

    where i = yield to maturity, n = Number of years till maturity

    = $1000 / (1+8.8%) ^10

    = $1000 / (1.088) ^10

    = $1000 / 2.32428

    = $ 430.2407

    = $430.241 (approximately)
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