Z Best,Inc.sold a 5-year,$1,000,zero-interest bond for $497.18 when the market rate of interest was 15%.The total cost of borrowing $497.18 is ________.

Question

Quizplus · Accepted Answer

To solve the problem, we need to find the present value of the zero-interest bond using the present value formula:

Present Value = Future Value / (1 + market rate of interest)^n

where n is the number of years.

In this case, the future value is $1,000, the market rate of interest is 15%, and n is 5 years. Plugging these values into the formula, we get:

Present Value = $1,000 / (1 + 0.15)^5
= $497.18

This means that the bond was sold for its present value, which is $497.18. Therefore, the total cost of borrowing $497.18 is also $497.18.

However, since the bond had a face value of $1,000, the buyer effectively received a discount of $502.82 ($1,000 - $497.18). This is the cost savings for the buyer, but it is not relevant to the question asked. Therefore, the best choice is B.