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Description of zero coupon bonds

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Consider three zero-coupon, $1,000 face-value bonds. Bond A matures one year from today, Bond B matures five years from today and Bond C matures ten years from today. The current market interest rate is 11% per annum (effective annual yield).

a. What is the current price of each bond?
b. If the market interest rate suddenly rises to 14% per annum (effective annual yield), what will the price of each bond be?
c. Which bond experienced the greatest percentage change in price?

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Solution Summary

The solution explains various calculations relating to zero coupon bonds.

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The price of the bonds is the present value of interest and principal. In this case since these are zero coupon bonds, there is no interest. The price of the bonds is the present value of the principal amount. We can find out the PV by discounting the face value.

PV = 1,000/(1+r)^n

a. What is the current price of each bond?

Bond A - matures in ...

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