What would you pay for a newly issued 10-year bond with face value of $10,000 and no coupon payments? Assume the interest rate is 5 percent (0.05)per year.

Question

Quizplus · Accepted Answer

This bond is a zero coupon bond, which means it does not pay any coupon payments. Therefore, the only payment is the face value of $10,000 at maturity. To calculate the present value of this payment, we need to use the formula:
Present value = Face value / (1+interest rate)^n
where n is the number of years until maturity. In this case, n=10.

Present value = 10,000 / (1+0.05)^10
Present value = $6139.13 
Therefore, the best choice is B.

What Would You Pay for a Newly Issued 10-Year Bond