Calculate the price of a zero-coupon bond that matures in five years if the market interest rate is 7.50 percent. (Assume semiannual compounding and $1,000 par value.)
A) $692.04
B) $696.57
C) $962.50
D) $1,000.00

Question

Quizplus · Accepted Answer

The price of a zero-coupon bond can be calculated using the formula: Price = Par Value / (1 + r/n)^(nt), where r is the annual interest rate, n is the number of compounding periods per year, t is the time to maturity in years, and Par Value is the face value of the bond. Here, r = 0.075 (7.50%), n = 2 (semiannual compounding), t = 5 years, and Par Value = $1,000. Plugging these values into the formula gives: Price = $1,000 / (1 + 0.075/2)^(2*5) = $1,000 / (1.0375)^10 ≈ $692.04.

Calculate the Price of a Zero-Coupon Bond That Matures in Five