Asked by Shalonda Lyons on May 07, 2024
Verified
If the yield to maturity is 5.5%,what is the price of a 15-year,zero-coupon bond with a par value of $1,000?
A) $413.35
B) $429.48
C) $447.93
D) $469.72
Zero-Coupon Bond
A debt security that does not pay interest (coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its face value.
Yield to Maturity
The total return anticipated on a bond if held until it matures, considering all payments of interest and principal and the time value of money.
Par Value
The face value of a bond or stock, typically the value printed on the certificate, which does not necessarily reflect its market value.
- Elucidate on the notions of discount, premium, and par value within the context of pricing bonds.
- Understand the role and consequences of different types of bonds such as callable, convertible, and zero-coupon.
Verified Answer
MH
Mesha HarrisMay 11, 2024
Final Answer :
C
Explanation :
The formula to calculate the price of a zero-coupon bond is:
Price = Par Value / (1 + Yield to Maturity)^(Number of Years to Maturity)
Plugging in the given values, we get:
Price = 1000 / (1 + 0.055)^15
Price = 1000 / 1.896
Price = $527.88
Therefore, the correct answer is C) $447.93.
Price = Par Value / (1 + Yield to Maturity)^(Number of Years to Maturity)
Plugging in the given values, we get:
Price = 1000 / (1 + 0.055)^15
Price = 1000 / 1.896
Price = $527.88
Therefore, the correct answer is C) $447.93.
Learning Objectives
- Elucidate on the notions of discount, premium, and par value within the context of pricing bonds.
- Understand the role and consequences of different types of bonds such as callable, convertible, and zero-coupon.