Zero Coupon Bonds 7. Zen recently bought a zero coupon bond for $245. It matures
ID: 2632229 • Letter: Z
Question
Zero Coupon Bonds
7. Zen recently bought a zero coupon bond for $245. It matures in 23 years and will pay $1,000 at maturity. What is the return that Zen will earn if he holds the bond until maturity?
8. Abigail is looking at a zero coupon bond that will pay $5,000 at maturity in 13 years. She will not invest unless she can earn at least 6.5% on her money. What is the most she will pay for the bond?
9. Billy Bob bought a zero coupon bond 2 years ago for $425. It matures in 9 years when it will pay $1,000. What will Billy Bob
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Part 7:
Nper = 23 (indicates the period)
FV =1000 (indicates the face value)
PMT = 0 (indicates zero interest payment)
PV = 245 (indicates the current price)
Rate = ? (indicates the rate of return)
Rate of Return = Rate(Nper,PMT,PV,FV) = Rate(23,0,-245,1000) = 6.31%
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Part 8:
Nper = 13 (indicates the period)
Rate = 6.5% (indicates the rate of return)
FV = 5000 (indicates the face value of bonds)
PMT = 0 (indicates the amount of zero interest payment)
PV = ? (indicates the purchase price)
Purchase Price/Current Bond Price = PV(Rate,Nper,PMT,FV) = PV(6.5%,13,0,5000) = $2205.08
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Part 9:
Nper = 9-2 = 7 (indicates the period)
FV =1000 (indicates the face value)
PMT = 0 (indicates zero interest payment)
PV = 425 (indicates the current price)
Rate = ? (indicates the rate of return)
Rate of Return = Rate(Nper,PMT,PV,FV) = Rate(7,0,-425,1000) = 13%
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Part 10:
Nper = 19 (indicates the period)
Rate = 7.5% (indicates the rate of return)
FV = 1000 (indicates the face value of bonds)
PMT = 0 (indicates the amount of zero interest payment)
PV = ? (indicates the purchase price)
Purchase Price/Current Bond Price = PV(Rate,Nper,PMT,FV) = PV(7.5%,19,0,1000) = $253.07
Thanks.
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