Net Present Value Investments
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Which is the better investment assuming they have equal risks: a zero coupon bond with an initial price of $10,000 and a face value of $20,000 and an interest rate of 10%, or a coupon bond currently trading for $14,000 with an interest rate of 5% paid semiannually and a face value of $15,000. Both are 10 year bonds. Show how you arrived at this decision.
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Solution Summary
The expert examines net present value of investments.
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The fair price of zero coupon bond = 20000/(1+10%)^10=$7710.87
Let the rate of return received on semi-annual bonds is r, then we have
14000 = 15000/(1+r)^20 ...
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