question archive A zero coupon bond pays no annual coupon interest payments
A zero coupon bond pays no annual coupon interest payments
Subject:FinancePrice:2.87 Bought7
A zero coupon bond pays no annual coupon interest payments. When it matures at the end of 7.5 years it pays out $1,000. If investors wish to earn 2.35% per year on this bond investment, what is the current price of the bond? (Round to the nearest dollar.)
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Answer:
Nper = 7.5 Years (indicates the period)
Rate = 2.35% (indicates the required rate of interest)
PMT = 1000*0 = 0 (indicates zero coupon payment)
FV = 1000 (indicates the face value of bonds)
PV = ? (indicates the present value/current price of bonds)
Current Price = PV(Rate,Nper,PMT,FV) = PV(2.35%,7.5,0,1000) = $840.12
Answer is $840.12.
