A zero-coupon bond is a bond that is sold now at a discount...

A zero-coupon bond is a bond that is sold now at a discount and will pay its face value at the time when it matures; no interest payments are made. How much should a $\$ 10,000$ facevalue, zero-coupon bond, maturing in 10 years, be sold for now if its rate of return is to be $8 \%$ compounded annually?

A zero-coupon bond is a bond that is sold now at a discount and will pay its face value at the time when it matures; no interest payments are made.
How much should a $\$ 10,000$ facevalue, zero-coupon bond, maturing in 10 years, be sold for now if its rate of return is to be $8 \%$ compounded annually?

Labs

Want to see this concept in action?

NEW

Explore this concept interactively to see how it behaves as you change inputs.

View Labs

Key Concepts

Zero-Coupon Bond

A zero-coupon bond is a type of debt security that does not pay periodic interest. Instead, it is sold at a discount to its face value and pays the full face value at maturity. The return to the investor comes from the difference between the purchase price and the face value received at maturity.

Present Value

Present value is the concept of determining the current worth of a future sum of money or stream of cash flows given a specified rate of return. This principle is fundamental in finance as it reflects the time value of money—money available today is worth more than the same amount in the future due to its potential earning capacity.

Compounded Interest

Compounded interest refers to the process where the interest earned on an investment is reinvested to earn additional interest. In the context of bond pricing, compound interest is used to discount future cash flows back to their present value, ensuring that the accumulation of interest over periods is properly accounted for.

Discounting Future Cash Flows

Discounting future cash flows is a methodology used to convert expected future amounts into their present value based on a discount rate. This is crucial in determining the fair price of bonds and other investments, as it takes into account the earning potential of money over time.

Transcript

Please give Ace some feedback