Question

Assume semiannual compounding, what is the price of a 6-year, zero coupon bond paying $1,000 at maturity if the YTM is (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)):

		Price of the Bond
a.	4 percent	$
b.	9 percent	$
c.	14 percent	$

Answer 1

a.The price of the zero coupon bond is ,as it is a zero coupon bonds PMT = 0

FV = $1000

N = 12 YEARS ( semi-annual compounding, 6 * 2 = 12 years)

YTM = 4%/2 (semi-annual compounding, 4%/2 = 2%)

= 2%

So, the price of bond is ($788.4932)

= $788.49 ( rounded off to two decimal places)

b. Now, as the I/Y = 4.5%

The PV is = $589.6639

= $589.66 ( rounded off to two decimal places)

c. Now as the I/Y = 14%/ 2,

Keeping all other factors same,

= 7%

The price of bond is ,

PV = $444.0120

= $444.01 ( rounded off to two decimal places)