A zero-coupon bond pays no annual coupon interest payments. When it matures at the end of 10 years it pays out $1,000. If investors wish to earn 6.5% per year on this bond investment, what is the current price of the bond?

Answer: $532.73 (2 d. p)

Explanation:

Price of a zero coupon bond = M / (1 + r) ^n

M is the price at maturity which is = $1000

r is the required rate of interest which is = 6.5%

n is number of years until maturity which is 10 years.

Price is therefore:

=1000 / (1+0.065) ^10

=1000/1.065^10

=532.726

=$532.73 (2 d. p)

NB: 6.5% is

6.5/100 = 0.065