The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value falls from 8 percent to 7 percent. Which of the following is true of the value of the bond?

Question

Quizplus · Accepted Answer

For a zero-coupon bond, the value can be calculated using the formula:
Value = Face Value / (1 + r)^t
Where r is the interest rate and t is the time to maturity.
At 8%, the time to maturity is 10 years:
Value = 1000 / (1 + 0.08)^10 = $385.54
At 7%, the time to maturity is still 10 years:
Value = 1000 / (1 + 0.07)^10 = $508.34
Therefore, the correct choice is (E) and the value of the bond at 7% is $508.34.

The Interest Rate on a 10 Percent, 10-Year Zero-Coupon Bond