The following information relates to Questions 16-29

-The five-year spot rate is not given above; however, the forward price for a two-year zero-coupon bond beginning in three years is known to be 0.8479. The price today of a Five-year zero-coupon bond is closest to:
A) 0.7119.
B) 0.7835.
C) 0.9524.

Question

The following information relates to Questions 16-29
 
-The five-year spot rate is not given above; however, the forward price for a two-year zero-coupon bond beginning in three years is known to be 0.8479. The price today of a Five-year zero-coupon bond is closest to:
A) 0.7119. 
B) 0.7835. 
C) 0.9524.

Quizplus · Accepted Answer

The price of a five-year zero-coupon bond can be calculated using the forward price of a two-year bond starting in three years. The forward price of 0.8479 essentially means that in three years, the price to buy a bond that pays $1 in five years is $0.8479. To find the present value of this $0.8479 (which will be paid in three years), we need to discount it back to today. Assuming the forward rate represents a compounded annual rate, we can use the formula for present value: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value (0.8479 in this case), r is the annual rate, and n is the number of years. Without the specific rate, we can't calculate it directly, but the correct answer must account for the discounting effect over three years, making A) 0.7119 the closest and most plausible choice given the information provided.

The Following Information Relates to Questions 16-29