If
an investor has a required rate of return of 10% on
a 20year zero
coupon bond with a par
value of $1500, what should the investor pay for
the bond when it is issued?
a) $437.12
b) $997.24
c) $578.23
d) $222.97
e) None of the Above
The correct answer is d.
The value of a zero coupon bond is the present value
of the lumpsum principal payment. There is no semiannual
coupon payments, only the principal repayment (of
$1500) at maturity. Therefore the yield of the zero
coupon bond equals the PV of the par value. In this
question, the beginning value of the bond would be
1500 / (1.10^20) = $222.97.
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