A zero coupon bond is a bond that pays no return until it comes due and then pays the holder of the bond its face value.Suppose that a $2,000 zero coupon bond will come due on January 1, 2020.If the interest rate is 5% and will remain 5% forever, what will this bond be worth on January 1, 2005?

Question

Quizplus · Accepted Answer

To calculate the value of the bond in 2005, we need to discount the face value of $2,000 back to 2005 using the interest rate of 5%. We can use the formula:
Present Value = Future Value / (1 + Interest Rate)^Number of Years
Number of Years = 15 (from 2005 to 2020)
Present Value = $2,000 / (1 + 0.05)^15
Present Value = $2,000 / 1.5204
Present Value = $1,314.81 (rounded to the nearest cent)
Therefore, the bond will be worth $1,314.81 in 2005. Option D is the closest to this value: $2,000/1.05 = $1,904.76, but it is still higher than the actual value because it assumes annual compounding of interest.

A Zero Coupon Bond Is a Bond That Pays No