Question

FIN 320-Fall 2019 Homework: Chapter 6 Homework Sa HW Score: 6.06%, 0.67 c 3 of 11 (1 complete) Score: 0 of 1 pt P 6-5 (similar to) Question Help The current zero-coupon yield curve for risk-free bonds is as follows: Maturity (years) YTM 4 1 2 5.77% 5.01% 5.46% 6.02% 5.91% What is the price per $100 face value of a two-year, zero-coupon, risk-free bond? The price per $100 face value of the two-year, zero-coupon, risk-free bond is $ (Round to the nearest cent.) Enter your answer in the answer box and then click Check Answer. All parts showing Clear All Check Answer

Answer 1

The price per $100 face value of the two year, zero-coupon, risk-free bond is $89.91

Year	Cash flow	Present value factor @ 5.46%	Discounted cash flow
2	$   100.00	0.8991	89.91

• Price of a bond is the present value of all future cash flows from it discounted at a required rate of
  return. This required rate of return is the YTM.
• YTM is the yield the bond-holder earns provided he holds the bond till maturity.
• In this question, YTM is 5.46% for a two year, zero-coupon risk-free bond.
• Generally, the cash flows from a bond are periodic coupon payments and the redemption of face value on maturity.
• However, in the case of a zero-coupon bond, as the name suggests, there will be no coupon payments. These bonds are issued at a discount and redeemed at par value. The difference between redemption value (face value) and the issue price is the return on such bonds.
• Thus, the price of a zero-coupon bond is the present value of its face value (redeemed on maturity).
• This is calculated in the table given above.
  Zero – coupon bond value = - (1+rt
  

F = Face value (redeemed on maturity, in this question - year 2)

r = YTM

t = time to maturity