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Chapter 5: 11BP (page 529)

A 17-year, \(1,000 par value zero-coupon rate bond is to be issued to yield 7 percent.

a. What should be the initial price of the bond? (Take the present value of \)1,000 for 17 years at 7 percent.)

b. If immediately upon issue, interest rates dropped to 6 percent, what would be the value of the zero-coupon rate bond?

c. If immediately upon issue, interest rates increased to 9 percent, what would be the value of the zero-coupon rate bond?

Short Answer

Expert verified

(a) The initial price of the bond is computed as $316.57

(b) The price of the bond at the interest of 6% is $371.36

(c) The price of the bond at the interest of 9% is $231.07

Step by step solution

01

Computation of Initial Price of bond

InitialPriceofbond=ParValue×1(1+r)t=1,000×1(1+0.07)17=$316.57

02

Computation of price of the bond at interest rate of 6%

Priceofbond=ParValue×1(1+r)t=1,000×1(1+0.06)17=$371.36

03

Computation of price of the bond at an interest rate of 6%

Priceofbond=ParValue×1(1+r)t=1,000×1(1+0.09)17=$231.07

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