Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of 3-year zero-coupon bond with a par value of $1,000?
A)$889.08
B)$816.58
C)$772.18
D)$765.55

Question

Suppose that all investors expect that interest rates for the 4 years will be as follows:  What is the price of 3-year zero-coupon bond with a par value of $1,000?
A)$889.08 
B)$816.58 
C)$772.18 
D)$765.55

Quizplus · Accepted Answer

We can calculate the price of the 3-year zero-coupon bond by discounting the future value of the bond ($1,000) back to the present using the expected interest rates. We can use the following formula:
P = FV / (1 + r)^n
where P is the price of the bond, FV is the future value, r is the annual interest rate, and n is the number of years.
Using the expected interest rates given in the question, we can calculate the present value of the bond as follows:
P = 1000 / (1 + 0.08)^1 + 1000 / (1 + 0.09)^2 + 1000 / (1 + 0.1)^3
P = $889.08
Therefore, the best choice is A.

Suppose That All Investors Expect That Interest Rates for the 4