Zeta Corporation has issued a $1,000 face value zero-coupon bond. Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?
A) $968.
B) $731.
C) $1,000.
D) $1,125.

Question

Quizplus · Accepted Answer

The price of a zero-coupon bond is calculated by discounting its face value back to the present using the formula $ P = \frac{F}{(1 + r)^n} $, where $ P $ is the price, $ F $ is the face value, $ r $ is the annual discount rate, and $ n $ is the number of years until maturity. Plugging in the given values ($ F = 1000 $, $ r = 0.04 $, $ n = 8 $), we get $ P = \frac{1000}{(1 + 0.04)^8} \approx 731 $.

Zeta Corporation Has Issued a $1,000 Face Value Zero-Coupon Bond