Your firm offers a 10-year, zero coupon bond (i. e., coupon rate is 0%). The yield to maturity is 8.8 percent. What is the current market price of a $1,000 face value bond?

The correct answer to the following question is $430.241

Explanation:

Zero coupon bond which are also know as pure discount bond, are those bonds which are issued at discount and makes no periodic interest payments to the bearer.

Given information -

Face value at maturity - $1000

Yield to maturity - 8.8%

Number of years till maturity - $10

Current market price - maturity value / (1 + i) ^n

where i = yield to maturity, n = Number of years till maturity

= $1000 / (1+8.8%) ^10

= $1000 / (1.088) ^10

= $1000 / 2.32428

= $ 430.2407

= $430.241 (approximately)