Zero coupon bonds: Shana Norris wants to buy five-year zero coupon bonds with a face value of $1,000. Her opportunity cost is 8.5 percent. Assuming annual compounding, what would be the current market price of these bonds? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

The formula for determining the price of a zero coupon bond is:
Price = Face Value / (1 + r)n
where r is the annual interest rate and n is the number of years until maturity.

In this case, r is the opportunity cost of 8.5% and n is 5 years. Plugging these values into the formula:
Price = 1000 / (1 + 0.085)5 = $665.12

Rounding to the nearest dollar, the current market price of the bonds would be $665. Therefore, the best choice is B.

Zero Coupon Bonds: Shana Norris Wants to Buy Five-Year Zero