Question

Suppose a friend of yours purchases a zero coupon bond for Rs214.55 with a face value of Rs1,000 maturing in twenty years. If the yield to maturity on the bond remains unchanged, what will the price of the bond be at the end of five years from now?

Answer 1

Answer:  Since we know the bond's price, its maturity and its par value at maturity, we can easily figure the yield to maturity, at which it was purchased, like this:

 

2 - [1,000 / 214.55]^(1/20) ==1.08 - 1 x 100 ==8% -bond's yield to maturity

 

3 - Will use this simple FV formula to find its value 5 years from now: FV ==PV x [1  +  R]^N ==214.55 x 1.08^5 ==214.55 x  1.4693280768 ==Rs 315.24 - bond's value 5 years from now

Explanation: