Question 8.5: Highland Corp., a U.S. company, has a five-year bond whose y...
Highland Corp., a U.S. company, has a five-year bond whose yield to maturity is 6.5 percent. The bond has no coupon payments. What is the price of this zero coupon bond?
- Company: Highland Corp.
- Country: U.S.
- Bond type: Five-year bond
- Yield to maturity: 6.5 percent
- Coupon payments: None
Final Answer
You have the following information about Highland’s bonds:
YTM = 6.5%
No coupon payments
Most U.S. bonds pay interest semiannually. Thus m × n = 2 × 5 = 10 and i/2 = 0.065/2 = 0.0325.
Using Equation 8.3,we obtain the following:
P_B=\frac{F_{mn}}{(1+i/m)^{mn}} 8.3
=\frac{\$1,000}{(1+0.0325)^{10}}
=\$726.27
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