Sarah Allen is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market interest rate for similar investments is 9.5 percent. Assume annual coupon payments. What is the current value of this bond

The current value of this bond is $635.

Explanation:

Zero coupon bond is a bond which does not offer any coupon payment but it issues on deep discount value.

Use following formula to calculate the price of zero coupon bond.

Price = M / (1 + i)^n

M = coupon value = $1,000

i = interest rate = 9.5% = 0.095

n= number of year = 5

Price = $1,000 / (1 + 0.095)^5

Price = $635.23

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