Asked by Emily Schreurs on Jul 09, 2024
Verified
Ted's Co. offers a zero-coupon bond with an 11.3% yield to maturity. The bond matures in 16 years. What is the current price of a $1,000 face value bond?
A) $178.78
B) $180.33
C) $188.36
D) $190.09
E) $192.18
Zero-Coupon Bond
A bond that does not pay periodic interest and is sold at a significant discount to its face value, which is paid at the bond's maturity.
Yield To Maturity
The total return anticipated on a bond if it is held until it matures, including both interest payments and the gain or loss incurred if purchased at a price different from its face value.
Face Value
The nominal or dollar value printed on a security, such as a bond or stock certificate, representing the amount due to the holder at maturity, not including interest or dividends.
- Expound on the characteristics of zero-coupon bonds and evaluate their price at assorted times.
- Understand and apply the concepts of yield to maturity and coupon rates to determine bond values.
Verified Answer
CG
Cassidy GennermanJul 15, 2024
Final Answer :
B
Explanation :
Using the formula for present value of a zero-coupon bond:
PV = FV / (1 + r)^n
where PV is the present value, FV is the face value, r is the annual yield to maturity, and n is the number of years until maturity.
Substituting the given values, we get:
PV = 1000 / (1 + 0.113)^16
PV = $180.33
Therefore, the current price of the bond is $180.33, which corresponds to choice B.
PV = FV / (1 + r)^n
where PV is the present value, FV is the face value, r is the annual yield to maturity, and n is the number of years until maturity.
Substituting the given values, we get:
PV = 1000 / (1 + 0.113)^16
PV = $180.33
Therefore, the current price of the bond is $180.33, which corresponds to choice B.
Learning Objectives
- Expound on the characteristics of zero-coupon bonds and evaluate their price at assorted times.
- Understand and apply the concepts of yield to maturity and coupon rates to determine bond values.