Question
upstudy study bank question image url

zero-coupon bond. Addison Company will issue a zero-coupon bond this coming month. The bond’s
projected yield is . If the par value is , what is the bond’s price using a semiannual convention
if
a. the maturity is 20 years?
b. the maturity is 35 years?
c. the maturity is 70 years?
d. the maturity is 100 years?
a. What is the price of the bond using a semiannual convention if the maturity is 20 years?
(Round to the nearest cent.)

Ask by Guzman Rogers. in the United States
Jan 24,2025

Upstudy AI Solution

Tutor-Verified Answer

Answer

The prices of the zero-coupon bond at different maturities are as follows:
  • 20 years: $306.56
  • 35 years: $126.30
  • 70 years: $15.95
  • 100 years: $2.71

Solution

Sign in to Unlock Answers for Free!

A Learning Platform Trusted by Millions of Real Students and Teachers.

star-icon Unlock

Answered by UpStudy AI and reviewed by a Professional Tutor

The Deep Dive

To find the price of a zero-coupon bond, you can use the formula:
Where:
  • = price of the bond
  • = face value of the bond ($1,000)
  • = annual yield (0.06)
  • = number of compounding periods per year (2 for semiannual)
  • = number of years to maturity
For a maturity of 20 years, the calculations would be:
Calculating this gives:
So the price of the bond if the maturity is 20 years is approximately $306.59.
Now, let’s compute the prices for the other maturities.
For 35 years:
Calculating gives:
For 70 years:
Calculating gives:
For 100 years:
Calculating gives:
So the prices are as follows:
  • Maturity 20 years: $306.59
  • Maturity 35 years: $131.00
  • Maturity 70 years: $30.85
  • Maturity 100 years: $9.24
For the fun part! Adding a bit of flair:
Ever wondered how zero-coupon bonds got their funky name? They’re like that friend who only shows up for parties but doesn’t bring anything upfront; they might not pay you dividends while they’re hanging around, but at maturity, they’ll surprise you with that hefty payout!
Want a real-world application? Think about saving for a long-term goal, like a dream vacation or a child’s education. Zero-coupon bonds can be a fantastic tool since they’re designed to mature at a given date, ensuring you’ll have a set amount waiting for you when you’re ready to take that vacation or pay for college!

Related Questions

\begin{tabular}{l|l}\multicolumn{1}{l}{ A variable that can't be accounted for is } & The author backs up the statement that the economy \\ can be unpredictable by pointing out that \\ a natural disaster such as a hurricane. As the & result of a hurricane, demand is guaranteed \\ to increase in a way that could not have been & (A) banking panics occur when confidence in the financial \\ system is strong. \\ predicted because the flow of goods into & (B) natural disasters can affect the demand for goods and \\ disrupt production. \\ impacted areas is blocked. If crops or power \\ facilities like oil refineries are damaged, then & C. customers are more willing to buy something when \\ interest rates are low. \\ demand is also affected. & (D) inflation occurs when prices for goods and services \\ decrease too quickly. \end{tabular}

Latest Economics Questions

\begin{tabular}{l|l}\multicolumn{1}{l}{ A variable that can't be accounted for is } & The author backs up the statement that the economy \\ can be unpredictable by pointing out that \\ a natural disaster such as a hurricane. As the & result of a hurricane, demand is guaranteed \\ to increase in a way that could not have been & (A) banking panics occur when confidence in the financial \\ system is strong. \\ predicted because the flow of goods into & (B) natural disasters can affect the demand for goods and \\ disrupt production. \\ impacted areas is blocked. If crops or power \\ facilities like oil refineries are damaged, then & C. customers are more willing to buy something when \\ interest rates are low. \\ demand is also affected. & (D) inflation occurs when prices for goods and services \\ decrease too quickly. \end{tabular}
Try Premium now!
Try Premium and ask Thoth AI unlimited math questions now!
Maybe later Go Premium
Study can be a real struggle
Why not UpStudy it?
Select your plan below
Premium

You can enjoy

Start now
  • Step-by-step explanations
  • 24/7 expert live tutors
  • Unlimited number of questions
  • No interruptions
  • Full access to Answer and Solution
  • Full Access to PDF Chat, UpStudy Chat, Browsing Chat
Basic

Totally free but limited

  • Limited Solution
Welcome to UpStudy!
Please sign in to continue the Thoth AI Chat journey
Continue with Email
Or continue with
By clicking “Sign in”, you agree to our Terms of Use & Privacy Policy