Asked by Jeanette Retana on Jul 18, 2024
Verified
Sara wants to buy a zero-coupon bond that will pay her $1,000 ten years from today. How much should Sara pay today to buy this bond if she wants to earn 7.5% on her investment?
A) $485.19
B) $523.13
C) $750.00
D) $925.00
E) $1,000.00
Zero-Coupon Bond
A debt security that is issued at a discount and repaid at face value but does not pay interest during its life.
Investment
The allocation of resources (such as time, money, or effort) in the expectation of generating an income or profit.
Face Value
The nominal value of a security stated by the issuer, typically found on bonds and stock certificates.
- Elucidate on the qualities of zero-coupon bonds and assess their value at several junctures.
- Ascertain the monetary value of bonds in light of different market conditions, factoring in interest rate movements and the time until maturity.
Verified Answer
SR
SOUBHANGI RAJKHOWAJul 20, 2024
Final Answer :
A
Explanation :
To find the present value of the zero-coupon bond, use the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($1,000), r is the annual interest rate (7.5% or 0.075), and n is the number of years (10). Plugging in the values, PV = $1,000 / (1 + 0.075)^10 = $485.19.
Learning Objectives
- Elucidate on the qualities of zero-coupon bonds and assess their value at several junctures.
- Ascertain the monetary value of bonds in light of different market conditions, factoring in interest rate movements and the time until maturity.