You paid $713 last year for a zero-coupon bond that promised to pay you $1,000 at the end of 5 years. Rather than hold it for the remaining four years, you have decided to sell it today. The
Prevailing effective annual interest rate is 9%. To the nearest dollar, what price do you expect
To get for your bond?
A)$763
B)$708
C)$777
D)This cannot be determined with the information provided.

Question

Quizplus · Accepted Answer

To calculate the price you can sell the bond for today, we need to use the formula for present value of a lump sum:
Present value = Future value / (1+r)^n
where r is the annual interest rate and n is the number of compounding periods.

In this case, the future value is $1,000, the annual interest rate is 9%, and the number of compounding periods is 4 (since you are selling the bond after 1 year). Plugging in the numbers, we get:

Present value = $1,000 / (1+0.09)^4
Present value = $713.02

This means that the fair price you can sell your bond for today is approximately $713. However, because of market conditions or other factors, you may not be able to get the exact fair price. The closest answer choice is B, $708. To determine the price you can get for your bond, we need to calculate the Present Value (PV) of the bond using the following formula:
PV = FV / (1 + r)^n

Where FV is the future value of the bond, r is the interest rate, and n is the number of years. Plugging in the values, we get:

PV = 1,000 / (1 + 0.09)^5 = $708.02

Therefore, the closest answer choice is B ($708).

You Paid $713 Last Year for a Zero-Coupon Bond That