Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 5 years if the market interest rate is 7.50 percent. (Assume semi-annual compounding and $1,000 par value.)

Question

Quizplus · Accepted Answer

The formula for calculating the price of a zero coupon bond is:

Price = Face Value / (1 + r)n

Where:

Face Value = $1,000 
r = the annual interest rate / 2 (since the bond compounds semi-annually) 
n = the number of periods (in this case, 5 years * 2 = 10 periods)

Plugging in the given values:

Price = $1,000 / (1 + 0.075/2)10

Price = $1,000 / 1.07510

Price = $692.02

Thus, the correct choice is A) $692.02 as it is the calculated price for the given bond.

Zero Coupon Bond Price Calculate the Price of a Zero