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What is the price today (in dollars and cents) of a 20-year zero coupon bond if the required rate of return is 6.95%. The bond face value is $1000. $ Place your answer in dollars and cents. You should set your calculator for at least four decimal places of accuracy. I'll remind you of this from time to time but this is a working rule throughout the semester. Do not include a dollar sign or comma in your answer. This is another rule that I'll remind you of but should be a working rule throughout the semester.

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Shahzaibfaraz

Answer:

Bond Price - Zero Coupon Bond = 260.8460 rounded off to 260.85

Explanation:

A zero coupon bond is a kind of bond which pays no periodic interest of coupon payments. Instead it is offered at a discount and it pays the par/face value at maturity. The difference between the par/face value and the issue price is the interest rate which is embedded in price of the bond. Thus, the formula to calculate the price of a zero coupon bond is as follows,

Bond Price - Zero Coupon Bond =  Face Value / (1+r)^n

Where,

  • r is the required rate of return
  • n is the number of periods  till maturity

Bond Price - Zero Coupon Bond =  1000 / (1+0.0695)^20

Bond Price - Zero Coupon Bond = 260.8460 rounded off to 260.85

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