Zero coupon bonds: The Australian Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that coupon payments are normally semiannual. What will be the current market price of these bonds if the opportunity cost for similar investments in the market is 6.75 percent? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

Zero coupon bonds do not pay any interest during their life and are sold at a discount to their face value. To determine the current market price of the bond, we need to discount the future value by the opportunity cost in the market. The formula for the present value of a zero coupon bond is: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods. In this case, FV = $1,000, n = 20 (10 years x 2 since coupon payments are semiannual), and r = 6.75% / 2 = 3.375%. Therefore, PV = $1,000 / (1.03375)^20 = $515. Round to the nearest dollar, the current market price of the bond is $515. Therefore, the best choice is C.

Zero Coupon Bonds: the Australian Treasury Has Issued 10-Year Zero