Zero coupon bonds: The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that coupon payments are normally semiannual. 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 to the nearest dollar.)

Question

Quizplus · Accepted Answer

Zero coupon bonds do not pay any coupon payments, hence their price is determined solely based on the present value of the face value received at maturity. Using the present value formula, we can calculate the price of the bond:
Price = Face value / (1 + r)^n 
where r is the interest rate and n is the number of periods (in this case, semiannual periods). 
In this case, r = 0.0675/2 = 0.03375 and n = 10*2 = 20. 
Plugging in the values, we get:
Price = 1000 / (1 + 0.03375)^20 = $515 (rounded to the nearest dollar). 
Therefore, the best choice is C.

Zero Coupon Bonds: the U