The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that the bond compounds interest semiannually. What will be the current market price of these bonds if the opportunity cost for similar investments in the market is 6.75 percent? (Round your answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

The formula to calculate the current market price of a zero coupon bond is:

P = FV / (1 + r)^n

Where:
P = current market price
FV = face value
r = semi-annual interest rate
n = number of semi-annual periods

In this case, the bond has a face value of $1,000, a semi-annual interest rate of 3.375% (half of 6.75%), and a term of 20 semi-annual periods (10 years x 2 semi-annual periods per year).

Using the formula, we get:

P = 1000 / (1 + 0.03375)^20
P = 515.27

Rounding to the nearest dollar, the current market price of the bond is $515. Therefore, the best choice is C.

The US Treasury Has Issued 10-Year Zero Coupon Bonds with a a Face