a zero bond is bond sold now at a discount and it will pay it's vace value at the time it matures, no interest payments are made. A zero bond can be redemmed on 20 yeard for $10,000. How much should you be willing to pay for it now if you want a return of 11% compounded quarterly 11% compounded continuously
a zero bond is bond sold now at a discount and it will pay it's vace value at the time it matures, no interest payments are made. A zero bond can be redemmed on 20 yeard for $10,000. How much should you be willing to pay for it now if you want a return of
11% compounded quarterly
11% compounded continuously
Face Value of the Bond = F = $10,000
Return
a. r = 11% compounded quarterly;
b. r=11% compounded continuously
No. of Years = t= 20 years
To calculate the present value of the bond
A zero coupon bond is a bond that pays the face value at maturity and is sold for a present value at a discount to the face value.
The formula for Present value of a Zero Coupon Bond is as follows:
a.
where,
F=face value
P=Present value
n=no. of compounding per year
t=no. of years
r=rate of interest
b. In case of a bond with continuous compounding, the formula is as follows:
where,
e is the mathematical constant with approximated value as 2.7183
Step by step
Solved in 3 steps with 4 images
