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Sarah Allen 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 9.5 percent. Assume annual coupon payments. What is the current value of this bond

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hyderali230

Answer:

The current value of this bond is $635.

Explanation:

Zero coupon bond is a bond which does not offer any coupon payment but it issues on deep discount value.

Use following formula to calculate the price of zero coupon bond.

Price = M / (1 + i)^n

M = coupon value = $1,000

i = interest rate = 9.5% = 0.095

n= number of year = 5

Price = $1,000 / (1 + 0.095)^5

Price = $635.23

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