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A zero-coupon bond is a security that pays no interest, and is therefore bought at a substantial discount from its face value. If the interest rate is 5% with annual compounding how much would you pay today for a zero-coupon bond with a face value of $1,200 that matures in 9 years?

Respuesta :

Answer:

$773.53

Explanation:

Given:

Interest rate, r = 5% compounded annually

Face value = $1,200

Time , n = 9 years

Now,

the Price of zero coupon bond is calculated as:

Price of zero coupon bond = [tex]\frac{\textup{Face value}}{{(1+r)^n}}[/tex]

or

Price of zero coupon bond  = [tex]\frac{1,200}{{(1+0.05)^9}}[/tex]

or

Price of zero coupon bond  = $773.53

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