You find a zero coupon bond with a par value of 10000 and 14

You find a zero coupon bond with a par value of $10,000 and 14 years to maturity. The yield to maturity on this bond is 5.1 percent. Assume semiannual compounding periods. What is the price of the bond?

Solution

Number of periods = 14 years , the number of periods for zero-coupon bonds will be doubled, so the zero coupon bond maturing in 14 years would have 28 periods (14 x 2). But here given is semiannually so , n =14

The required yield of 5.1% must also be divided by two because the number of periods used in the calculation has doubled. The yield for this bond is 2.55%.


M = 1000 , n =14 , i = 2.55 = 0.0255

Price = M / ( 1 + i ) ^n

= 1000 / ( 1 + 0.0255) ^14

= 702.91