Question

Zero-Coupon Bonds A child’s grandparents are considering buying a $40,000 face-value, zero-coupon bond at birth so that she will have money for her college education 17 years later. If they want a rate of return of 8% compounded annually, what should they pay for the bond?

Short answer

The child grandparents need to pay $10,810.76 for the bond to get a value of $40,000 in 17 years.

Step-by-step solution

Step 1. Given Information

A child’s grandparents are considering buying a $40,000 face-value, zero-coupon bond at birth so that she will have money for her college education 17 years later.

$$\begin{gathered} A=\$40,000 \\ t=17 \\ r=8\%=0.08 \\ n=1 \\ P=? \end{gathered}$$