A 10-year, $1,000 par value zero-coupon rate bond is to be issued to yield 7 percent. Calculate your final answer using the formula and financial calculator methods.

Required:

a. What should be the initial price of the bond?

b. If immediately upon issue, interest rates dropped to 6 percent, what would be the value of the zero-coupon rate bond?

c. If immediately upon issue, interest rates increased to 10 percent, what would be the value of the zero-coupon rate bond?

At 7% price of bond is $508.35

at 6% price of the bond is $558.39

at 10% price of the bond is $385.54

Explanation:

The present value formula given below is very useful here:

PV=FV * (1+r) ^-N

fv=$1000

r=7%

N=10

PV=1000 * (1+0.07) ^-10

PV=1000 * (1.07) ^-10

PV=$508.35

at 6% rate of return the price of the bond is computed as follows

fv=$1000

r=6%

N=10

PV=1000 * (1+0.06) ^-10

PV=1000 * (1.06) ^-10

PV=$558.39

at 10% rate of return the price of the bond is computed as follows

fv=$1000

r=10%

N=10

PV=1000 * (1+0.1) ^-10

PV=1000 * (1.1) ^-10

PV=$385.54