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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.

pur-new-sol

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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