Use the zero-coupon bond prices given in the following table to answer the questions that follow.
-Consider a three-year fixed rate coupon bond with principal of $10 million dollars and paying a coupon of 2 percent per year,paid yearly.What is the value of the bond when it is issued?

Question

Use the zero-coupon bond prices given in the following table to answer the questions that follow. 
-Consider a three-year fixed rate coupon bond with principal of $10 million dollars and paying a coupon of 2 percent per year,paid yearly.What is the value of the bond when it is issued?

Quizplus · Accepted Answer

Since the bond pays a fixed coupon rate of 2% per year, the annual cash flow received by the investor is $200,000 (2% of $10 million). The present value of this cash flow stream is the sum of the present values of each individual payment. Using the given zero-coupon bond prices, we can calculate the discount factor for each year as follows:
Year 1: 0.9709
Year 2: 0.9361
Year 3: 0.9003
The present value of the cash flows can now be calculated as follows:
PV = $200,000 × (0.9709 + 0.9361 + 0.9003) + $10,000,000 × 0.9003 = $9,552,000
Therefore, the value of the bond when it is issued is $9,552,000 (Option B).

Use the Zero-Coupon Bond Prices Given in the Following Table