Question

Ambrosia Olives is offering zero-coupon bonds that mature in 11 years, and interest compounds semiannually. To buy $1,000 par value, what price would you expect to pay if similar bonds offer a 7% yield to maturity?

If possible, please provide inputs used if solved with a financial calculator

Answer 1

Price of bond is calculated as present value of future cash flow from bonds. In case of zero coupon bond the only cash flow is par value received at end of the maturity period. Thus, present value is equal to present value of par value of bond

Formula to calculate price of zero coupon bonds

Price of bond = Par value*(1/((1+r)^n))

where r is yield to maturity and n is number of payments

Calculation of price of zero coupon bond is shown below

3.50% 7%/2 22 11*2 Price of bond Price of bond Price of bond 1000*(1/(1.035422)) 1000*0.469151 $469.15

Thus, price of zero coupon bond is $469.15