Suppose you purchase a zero-coupon bond with face value $1,000, maturing in 20 years, for $214.51. If the yield to maturity on the bond remains unchanged, what will the price of the bond be five years from now?

Question

Quizplus · Accepted Answer

The price of a zero-coupon bond can be calculated using the formula: Price = Face Value / (1 + yield)^n, where n is the number of years to maturity. Given that the bond was purchased for $214.51 and matures in 20 years, we can find the yield to maturity by rearranging the formula: 214.51 = 1000 / (1 + yield)^20. Solving for the yield gives us a constant rate that applies throughout the bond's life. Five years later, the bond will have 15 years left to maturity. Using the same yield and the formula, we calculate the new price with n = 15. The correct answer, $315.20, reflects the bond's price increase as it gets closer to maturity, assuming the yield remains unchanged.

Suppose You Purchase a Zero-Coupon Bond with Face Value $1,000