Ted's Co.offers a zero coupon bond with an 11.3% (annual)yield to maturity.The bond matures in 16 years.What is the current price of a $1,000 face value bond?

Question

Quizplus · Accepted Answer

To calculate the current price of a zero coupon bond, we need to use the formula:

PV = FV / (1 + r)^n

Where PV is the present value or current price, FV is the face value of the bond, r is the yield to maturity divided by the number of compounding periods per year, and n is the total number of compounding periods.

In this case, the yield to maturity is 11.3% annually, so the semi-annual yield is 5.65% (11.3% divided by 2). The bond matures in 16 years, which means there are 32 semi-annual periods (16 years x 2). Plugging these values into the formula, we get:

PV = 1000 / (1 + 0.0565)^32
PV = 1000 / 4.9167
PV = $203.43

Therefore, the current price of the bond is $203.43, which is closest to answer choice B.

Ted's CoOffers a Zero Coupon Bond with an 11