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21 March, 23:46

You find a zero coupon bond with a par value of $10,000 and 22 years to maturity. The yield to maturity on this bond is 4.4 percent. Assume semiannual compounding periods. What is the price of the bond?

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  1. 22 March, 01:17
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    The price of bond is $3838.49

    Explanation:

    The price of bond should be calculated on semiannual compounding periods which means that the rate is divided by 2 and years should be multiplied by 2

    In mathematically,

    Semi annual rate = Rate : 2

    = 4.4 : 2

    = 2.2%

    And, the semi annual year = total number of years * 2

    = 22 * 2

    =44

    The formula to compute the price of bond is shown below:

    = Coupon payment : (1 + rate) ^ number of years

    = $10,000 : (1 + 0.022) ^ 44

    = ($10,000 : 1.022) ^ 44

    = $3838.49

    Hence, the price of bond is $3838.49
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