A 16-year, $1,000 par value zero-coupon rate bond is to be issued to yield 6 percent. Required:
a. What should be the initial price of the bond?
b. If immediately upon issue, interest rates dropped to 5 percent, what would be the value of the zero-coupon rate bond?
c. If immediately upon issue, interest rates increased to 10 percent, what would be the value of the zero-coupon rate bond?

a) $393.65

b) $458.11

c) $217.63

Explanation:

Given data:

16-year  ( n )

$1000 par value  ( FV )

6% ( R )

A) determine the initial price of the bond

 = FV / ( 1 + R ) ^ n

= 1000 / ( 1.06 ) ^ 16

= 1000 / 2.5403 = $393.65

B ) when interest rate drops to 5% determine the value of the zero-coupon rate of bond

 = FV / ( 1 + R ) ^n

 = 1000 / ( 1.05 ) ^ 16

 = 1000 / 2.1829  = $458.11

C ) when interest rate increases to 10% determine the value of the zero-coupon rate of bond

=  Fv / ( 1 + R ) ^ n

=  1000 / ( 1.1 ) ^ 16

= 1000 / 4.5950 = $217.63

answer; im thinking the correct answer is (7years);

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