The value of a 20 year zero-coupon bond when the market required rate of return of 9% (semi-annual) is:
A) $414.64.
B) $318.38.
C) $171.93.
D) $178.43.

Question

Quizplus · Accepted Answer

The value of a zero-coupon bond is calculated using the formula: $ P = \frac{M}{(1 + r)^n} $, where $P$ is the price of the bond, $M$ is the maturity value (face value, usually $1000 for corporate bonds), $r$ is the required rate of return per period, and $n$ is the total number of periods. Given a 9% annual rate, compounded semi-annually, the period rate is $4.5\%$ or $0.045$. For a 20-year bond, there are $40$ periods (20 years * 2). Thus, $ P = \frac{1000}{(1 + 0.045)^{40}} = \frac{1000}{(1.045)^{40}} \approx \$171.93 $.

The Value of a 20 Year Zero-Coupon Bond When the Market