You have the option of purchasing a $1,000, 6% coupon bond with interest payable semiannually and a remaining term of 10 years, or a $1,000, zero coupon bond with a remaining term of 10 years. With a market yield of 8%, what percentage of face value would you pay for each bond?

Question

Quizplus · Accepted Answer

The zero coupon bond is priced using the formula for present value of a single sum, resulting in approximately 45.64% of face value. The coupon bond is priced using the present value of an annuity for the coupon payments and the present value of a single sum for the face value, resulting in approximately 86.41% of face value.

You Have the Option of Purchasing a $1,000, 6% Coupon