Calculate the price of a zerocoupon bond that matures in 14

Calculate the price of a zero-coupon bond that matures in 14 years if the market interest rate is 6.10 percent. Assume semiannual compounding.

Solution

Bonds have normally par value of $ 1,000. Price of bond is the present value of cash flow from bond. Zero coupon bond does not pay interest.So,price of zero coupon bond is the present value of par value of bond. Price of bond = Par Value x Present value of 1 = $ 1,000 x      0.4312 = $ 431.18 Working: Present Value of 1 = (1+i)^-n Where, = (1+0.0305)^-28 i 6.10%/2 = 0.0305 =         0.4312 n 14*2 = 28