The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $$\begin{array} { c c }
\text { Maturity } & \text { Price } \
\text { (Years) } & \
1 & \$ 943.40 \
2 & 881.68 \
3 & 808.88 \
4 & 742.05
\end{array}$$ What is the price of a 4-year maturity bond with a 12% coupon rate paid annually? (Par value = $1,000.)
A) $742.09
B) $1,222.09
C) $1,000.00
D) $1,141.84
E) None of the options are correct.

Question

The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $$\begin{array} { c c } 
\text { Maturity } & \text { Price } \
\text { (Years) } & \
1 & \$ 943.40 \
2 & 881.68 \
3 & 808.88 \
4 & 742.05
\end{array}$$ What is the price of a 4-year maturity bond with a 12% coupon rate paid annually? (Par value = $1,000.)
A) $742.09
B) $1,222.09
C) $1,000.00
D) $1,141.84
E) None of the options are correct.

Quizplus · Accepted Answer

The price of a coupon bond is the present value of its future cash flows, which include the annual coupon payments and the par value at maturity. The discount rates can be derived from the zero-coupon bond prices. Calculating the present value of the 4 annual $120 coupon payments and the $1,000 par value using the appropriate discount rates gives approximately $1,141.84.

The Following Is a List of Prices for Zero-Coupon Bonds