Question

If you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3 years later if interest rates have remained stable

a. $848.12
b. $911.15
c. $923.50
d. $862.92

Answer 1

Answer:

$862.92

Explanation:

We use this formula in other to solve this problem

price at issue = Fv / (1+r)n

Price at issue = $691.72

Future value fv = 1000

When we substitute into the formula

$691.72 = $1,000/(1+i)⁵

(1+i)⁵ =$1,000/$691.72

(1+i)⁵ = 1.445672

1 + i = (1.445672)1/5

1+i = 1.445672^0.2

1 + i= 1.0765

So that

I = 1.0765 -1

= 0.0765 also 7.65 %

We have after 3 years,

Price = Future Value/ (1+i)²

= $1,000/ 1.0765)²

= $1,000 / 1.158852

This gives us the value of

$ 862.9232

Therefore option d is the correct answer to the question