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Priscilla will make a 2-year investment using two consecutive 1-year $500,000 zero coupon bonds
Priscilla will make a 2-year investment using two consecutive 1-year $500,000 zero coupon bonds. The maturity proceeds of the first zero coupon bond will be rolled over into the second zero coupon bond. The purchase yields for the two 1-year zero coupon bonds will be 2.27% and 3.74% p.a., respectively (annual effective rates). Note that any surplus funds after one year can be invested for one year at a rate of 3.86% p.a.
a) Calculate the price of second zero coupon bond. Round your answer to four decimal places.
a.
481974.1662
b.
481417.2925
c.
481970.3007
d.
488901.9263
Expert Solution
Computation of Price of Second Zero Coupon Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of Second Zero Coupon Bond = ?
Rate = 3.74%
Nper = 1
PMT = 0
FV = $500,000
Substituting the values in formula:
=-pv(3.74%,1,0,500000)
PV or Price of Second Zero Coupon Bond = 481,974.1662
So, the correct option is A "481974.1662".
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