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Popular Word Problems >

A zero coupon bond with a face value of 27,000 matures in 14 years. What should the bond be sold for now if its rate of return is to be 2.965% compounded annually?

Solution

A zero co u p o n b o n d w i t h a f a ce v a l u e o f 27, 000 ma t u res in 14 ye a rs . Wha t s h o u l d t h e b o n d b e so l d f or n o w i f i t s r a t e o f re t u r n i s t o b e 2.965% co m p o u n d e d ann u a ll y ?

Solution

Principal : 17935.32

Solution steps

Translate the problem into an equation:

27000 = P (1 + \frac{0.02965}{1})^{1 \cdot 14}

Solve for

P, 27000 = P (1 + \frac{0.02965}{1})^{1 \cdot 14} : P = 17935.32

Principal : 17935.32

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