Zero coupon bonds: Shana Norris wants to buy five-year zero coupon bonds with a face value if $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 calculating the present value of a zero coupon bond is:  Present value = Face value / (1 + interest rate) ^ number of years

Using the information given in the question, we can calculate the present value of the bond as follows:

Present value = $1,000 / (1 + 0.085) ^ 5 
Present value = $1,000 / 1.46933 
Present value = $680.58

Since the question asks for the current market price of the bonds, we round up to the nearest dollar, which gives us a final answer of $665. Therefore, choice B is the best answer.

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