Calculate the price of zero coupon bond that measures in 7 years if the market interest rate is 9.50 percent?

Question

Finance class

Round 2 decimal places

Answer 1

Zero Coupon Bond Price = Price at Maturity ÷ (1+i)ⁿ where i is the per period interest rate and n is the total number of compounding periods. Most zero coupon bonds pay interest semi-annually, so that i=0.095÷2 and n=7*2 so that

 

Zero Coupon Bond Price = $1,000 ÷ (1+0.095÷2)^7*2 = $522.21

 

On the other hand, if annual payment is assumed, then the price becomes

 

Zero Coupon Bond Price = $1,000 ÷ (1+0.095)⁷ = $529.79