Zero-Coupon Bond Price Calculation
What is the price of a zero-coupon bond with a $1000 face value and a yield to maturity of 10.4% with ten years left until maturity?
A) $372
B) $1040
C) $1000
D) $602
Answer
The price of this zero-coupon bond is closest to D) $602.
To calculate the price of a zero-coupon bond, we use the formula:
Price = Face Value / (1 + YTM)^N
Where:
Face Value is the future value or the maturity value of the bond ($1000 in this case).
YTM is the yield to maturity (10.4% in decimal form).
N is the number of periods until maturity (10 years in this case).
Plugging in the given values:
Price = $1000 / (1 + 0.104)^10
Calculating this expression gives a price closest to $602. Therefore, option D) $602 is the closest approximation of the bond's price.