Zero coupon bonds: Robertsons Ltd is planning to expand its specialty stores into five other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. If your opportunity cost is 8 percent and similar coupon-bearing bonds will pay semiannually, what will be the price at which you will be willing to purchase these bonds? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

The price of a zero coupon bond is the present value of its face value, discounted at the appropriate interest rate. In this case, the face value is $1,000, the interest rate is 8%, and the time to maturity is 15 years. Using the formula for the present value of a single sum, we get:PV = FV / (1 + r)^nwhere:PV is the present valueFV is the future valuer is the interest raten is the number of periodsPlugging in the values, we get:PV = 1000 / (1 + 0.08)^15PV = $308.33Therefore, the price at which we would be willing to purchase these bonds is $308.

Zero Coupon Bonds: Robertsons Ltd Is Planning to Expand Its