Question

Calculate the price of a zero-coupon bond that matures in five years if the market interest rate is 7.50 percent. (Assume semiannual compounding and $1,000 par value.) Select one: A. $692.04 O B. $696.57 C. $962.50 D. $1,000.00 The 10-year Treasury rate is 4.5 percent while the average 10-year Aaa corporate bond debt carries an interest rate of 6.0 percent. What is the average default risk premium on Aaa corborate bonds? Select one: A. 2.25 percent B. 1.95 percent C. 0.75 percent D. 1.5 percent

Answer 1

1.

Correct answer: A. $692.04

Par value of Zero Bond(F) = $1,000

Years until maturity = 5

Compounding period in a year = 2

Period until maturity(n) = 10

Market interest rate = 7.50%

Market interest rate per period(i) = 7.50%/2 = 3.75%

Price of Zero Bond (P):

ul? +I)

1000 P (1 +0.0375) 10 (1+

P = $692.04

2.

Correct answer: D. 1.5 percent

Default risk premium = Aaa corporate bond interest rate - Treasury bond interest rate

Default risk premium = 6.0% – 4.5%

Default risk premium = 1.5%

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.