Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:What is the price of a $1,000 zero-coupon bond that matures in 10 years, if the
current interest rate on similar investments is 3%?
Expert Solution
Step 1
Bonds are financial instruments that provide fixed returns to their holders. Bonds actually have a nature of debt with a fixed interest rate and a maturity, also known as Plain Vanilla Bond. Some bonds have a callability feature that enables the issuer to call and buy back the bonds from the existing bondholders.
The price of a Zero Coupon Bond can be calculated as:
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