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Consider a government zero-coupon bond with a five-year maturity and an annual effective discount rate of 4%
Consider a government zero-coupon bond with a five-year maturity and an annual effective discount rate of 4%.
Which statement is correct for a five-year zero-coupon bond issued by a company, with a par value of 500?
Select one:
407.68 is a reasonable lower bound for the corporate bond price.
410.96 is a reasonable estimate for the corporate bond price.
410.96 is a reasonable upper bound for the corporate bond price. [WRONG]
4% is a reasonable lower bound for the annual effective discount rate associated with the corporate bond price.
Expert Solution
Computation of the price of the bond:-
FV = PV*(1+rate)^n
500 = PV*(1+4%)^5
PV = 500 / 1.21665
= 410.96
Hence, the correct option is 2). 410.96 is a reasonable estimate for the corporate bond price.
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