A Government of Canada zero-coupon bond has a yield to maturity of 4%.Investors believe that AB Company will default with certainty at the end of 1 year,only being able to pay 85% of its obligations.The company's bond promises $5,000 next year.What is the price of a one-year zero-coupon bond issued by AB Company?

Question

Quizplus · Accepted Answer

The price of the bond is the present value of the payment received at the end of the year, discounted at the yield to maturity. In this case, the payment is $5,000 * 85% = $4,250, and the yield to maturity is 4%. Therefore, the price of the bond is $4,250 / (1 + 0.04) = $4,086.54.

A Government of Canada Zero-Coupon Bond Has a Yield to Maturity