Question

Zero-Coupon Bonds A zero-coupon bond can be redeemed in 20 years for $10,000. How much should you be willing to pay for it now if you want a return of:

(a) 10% compounded monthly?

(b) 10% compounded continuously?

Short answer

You should be ready pay $1364.62 now to get a $10,000 refund after 20 years ( if the interest is done 10% compounded monthly.)

Step-by-step solution

Step 1. Given Information

A zero-coupon bond can be redeemed in 20 years for $10,000. How much should you be willing to pay for it now if you want a return of.

$$\begin{gathered} A=\$10,000 \\ t=20 \\ r=10\%=0.1 \\ n=12\left(compoundedmonthly\right) \end{gathered}$$