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Finding the Price of a Zero Coupon Bond

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A 15-year, $1,000 par value zero-coupon rate bond is to be issued to yield 10 percent.

a. What should be the initial price of the bond? (Take the present value of $1,000 to be received after 15 years at 10 percent, using Appendix B at the back of the text.)

b. If immediately upon issue, interest rates dropped to 8 percent, what would be the value of the zero-coupon rate bond?

c. If immediately upon issue, interest rates increased to 12 percent, what would be the value of the zero-coupon rate bond?

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Solution Summary

This solution describes the steps for finding price of a zero coupon bond. Price is calculated by using present value tables as well as by using formula.

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a.What should be the initial price of the bond? (Take the present value of $1,000 to be received after 15 years at 10 percent, using Appendix B at the back of the text.)

Using formula
Present Value of zero coupon bond=FV/(1+r/100)^n
Where n = number of periods
r = yield per period
Here n=15, FV =$1000, r=10%
PV=1000/(1+10/100)^15
...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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