This morning Tim purchased a 15-year, $1,000 face value zero coupon bond for $394.34. Assume the yield-to-maturity remains constant over the life of the bond. What price should Tim receive for
His bond if he wants to sell it 4 years from today?

Question

Quizplus · Accepted Answer

The correct answer is A because the price of a zero-coupon bond is equal to the present value of its future cash flows. In this case, the future cash flow is $1,000, and the yield-to-maturity is the same as the discount rate, which is 6.0%. The present value of $1,000 in 4 years at a discount rate of 6.0% is $505.40.

This Morning Tim Purchased a 15-Year, $1,000 Face Value Zero