Question

Asked May 4, 2019

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What is the current price of a zero-coupon bond with a 7 percent yield to maturity that matures in 20 years?

Step 1

Two assumptions are required before we proceed to calculate the price of the zero coupon bond:

1. Let's assume par value = face value of the bond, FV = $ 1,000

2. Let's assume the coupon payment convention in the market is semi annual that is coupons are in general paid semi annually on coupon bonds.

Both the assumptions are customary to such kind of problem.

Step 2

Since the coupon payment frequency assumed by us is semi annual, we need to convert the all the parameters corresponding to a period of 6 months.

Yield ...

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