Zero coupon bonds: Jarmine Corp. is planning to fund a project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual coupons to be the norm, what will be the price of these bonds if the appropriate discount rate is 14 percent? (Round to the closest answer.)

Question

Quizplus · Accepted Answer

Since the bonds are zero coupon bonds, there are no regular coupons to be paid. Therefore, the entire return is in the form of capital appreciation. The price of the bond can be calculated using the present value formula:

bond price = face value / (1 + r/n)^(n*t),

where r is the annual discount rate (14%), n is the number of times the interest is compounded each year (2), and t is the number of years until maturity (10).

Plugging in the numbers, we get:

bond price = $1,000 / (1 + 0.14/2)^(2*10) = $258.14.

Rounding to the closest answer, the answer is B) $258.

Zero Coupon Bonds: Jarmine Corp