Sara wants to buy a zero-coupon bond that will pay her $1,000 ten years from today. How much should Sara pay today to buy this bond if she wants to earn 7.5% on her investment?

Question

Quizplus · Accepted Answer

To find the present value of the zero-coupon bond, use the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($1,000), r is the annual interest rate (7.5% or 0.075), and n is the number of years (10). Plugging in the values, PV = $1,000 / (1 + 0.075)^10 = $485.19.

Sara Wants to Buy a Zero-Coupon Bond That Will Pay