Arts and Crafts Warehouse wants to issue 15-year,zero-coupon bonds that yield 7.5 percent.What price should it charge for these bonds if the face value is $1,000? Assume semiannual compounding.

Question

Quizplus · Accepted Answer

We can use the formula for calculating the present value of a bond:

PV = FV / (1 + r)^n

where PV is the present value, FV is the face value, r is the semi-annual yield, and n is the number of semi-annual periods (i.e. years x 2).

In this case, the semi-annual yield is 7.5%/2 = 3.75% and the number of periods is 15 x 2 = 30.

Plugging these values into the formula, we get:

PV = 1000 / (1 + 0.0375)^30
PV = $331.40

Therefore, the price that Arts and Crafts Warehouse should charge for these bonds is $331.40. Option B is the correct answer.

Arts and Crafts Warehouse Wants to Issue 15-Year,zero-Coupon Bonds That