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Bond valuation : If a $1,000 zero coupon bond with a fifteen-year maturity has a market price of...

Question:

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

Thus,

315.20 = 1000 / (1 + Yield)^15

or,

Yield = 8.00%


Learn more about this topic:

Government, Zero-Coupon & Floating-Rate Bonds

from Finance 101: Principles of Finance

Chapter 7 / Lesson 4
2.1K

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