Bond valuation : If a $1,000 zero coupon bond with a fifteen-year maturity has a market price of $315.20.
What is the rate of the return?
Zero Coupon Bonds:
Zero coupon bond is the bond which pays no annual coupons just the maturity amount is paid. So the price of a Zero Coupon Bond is the present value of the maturity amount of the bond.
Answer and Explanation:
Value of a ZCB = Maturity Amount / (1 + Yield)^Number of years to maturity
In the question,
Value of ZCB = $315.20
Maturity = $1,000.00
Yield = Rate to be found out
Number of years to maturity = 15
315.20 = 1000 / (1 + Yield)^15
Yield = 8.00%
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from Finance 101: Principles of FinanceChapter 7 / Lesson 4
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