Crown King zero coupon bonds were issued in 1998 at $124. These bonds will mature in 2018. What will these bonds sell for in 2008 if the required rate of return in 2008 is 9.5%?

Question

Quizplus · Accepted Answer

Zero coupon bonds are sold at a discount and mature at face value. The price in 2008 can be calculated using the formula for the present value of a zero coupon bond: $ P = \frac{F}{(1 + r)^n} $, where $ F $ is the face value, $ r $ is the required rate of return, and $ n $ is the number of years to maturity. Here, $ F $ is the maturity value, $ r = 9.5\% $, and $ n = 10 $ years (from 2008 to 2018). Solving this gives approximately $404.

Crown King Zero Coupon Bonds Were Issued in 1998 at $124