$\begin{array}{cc}
\text { Year } & \text { 1 Year Forward Rate } \
1 & 4.5\% \
2 & 5.2\% \
3 & 5.9\% \
4 & 6.3\% \
5 & 6.8 \% \
6 & 7.0\%
\end{array}$
What should the purchase price of a 2-year zero-coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000?
A) $897.61
B) $888.33
C) $883.32
D) $893.36
E) $871.80

Question

$\begin{array}{cc}
\text { Year } & \text { 1 Year Forward Rate } \
1 & 4.5\% \
2 & 5.2\% \
3 & 5.9\% \
4 & 6.3\% \
5 & 6.8 \% \
6 & 7.0\%
\end{array}$
 What should the purchase price of a 2-year zero-coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000?
A) $897.61
B) $888.33
C) $883.32
D) $893.36
E) $871.80

Quizplus · Accepted Answer

The correct answer is A because the purchase price of a 2-year zero-coupon bond purchased at the beginning of year 2 with a face value of $1,000 is $897.61. This is calculated using the formula:Purchase price = Face value / (1 + Forward rate)^nwhere n is the number of years to maturity. In this case, n = 2, the face value is $1,000, and the forward rate for year 2 is 5.2%. Plugging these values into the formula, we get:Purchase price = 1000 / (1 + 0.052)^2 = $897.61

What Should the Purchase Price of a 2-Year Zero-Coupon Bond