Question

You paid $713 last year for a zero-coupon bond that promised to pay you $1,000 at the end of 5 years. Rather than hold it for the remaining four years, you have decided to sell it today. The prevailing effective annual interest rate is 9%. To the nearest dollar, what price do you expect to get for your bond?

Answer 1

Answer:

The bond today will be valued at 708.4252

Explanation:

The price for the bond will be the present value of 1,000 at the current market rate of 9%

We will use the present value of a lump sum to calculate this:

$\frac{Maturity}{(1 + rate)^{time} } = PV$

Maturity 1,000 dollars

time 4 years

rate         9% = 9/100 = 0.09

$\frac{1000}{(1 + 0.09)^{4} } = PV$

PV       $708.4252

This will be the expected market value for the bond.