Question

2. You find a zero coupon bond with a par value of $5,000 and 19 years to maturity. If the yield to maturity on this bond is 5.1 percent, what is the price of the bond? Assume semiannual compounding periods. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

NOTE- As compounding is semi-annually hence we will take yeild as 2.55%(for 6 months) and maturity periods is 38 years( 19 year*2)

CALCULATION OF PRICE OF ZERO COUPEN BOND

Price = $5,000 * PVAF (2.55%, 38)

= $ 5,000* 0.3841

Price = $ 1,920.50

Where,

PVAF= Prensent Value of Annuity Factor

ALTERNATE SOLUTION

Price = Par Value/(1+r)ⁿ

= $5,000/(1.0255)³⁸

Price = $1,920.86

Where,

r= Yeild to maturity

n= Maturity period