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27 October, 13:05

Sarah Allen is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market interest rate for similar investments is 9.5 percent. Assume annual coupon payments. What is the current value of this bond

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  1. 27 October, 13:28
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    The current value of this bond is $635.

    Explanation:

    Zero coupon bond is a bond which does not offer any coupon payment but it issues on deep discount value.

    Use following formula to calculate the price of zero coupon bond.

    Price = M / (1 + i) ^n

    M = coupon value = $1,000

    i = interest rate = 9.5% = 0.095

    n = number of year = 5

    Price = $1,000 / (1 + 0.095) ^5

    Price = $635.23
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