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You want to buy 10-year zero coupon bonds with a par value of $1,000 per bond. If investors require a rate of return of 10.4% p.a. compounded annually on similar investments in the market, what would be the current market price per bond? Round final answers to 4 decimal places.

Question

You want to buy 10-year zero coupon bonds with a par value of $1,000 per bond. If investors require a rate of return of 10.4% p.a. compounded annually on similar investments in the market, what would be the current market price per bond? Round final answers to 4 decimal places.

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Solution

The price of a zero-coupon bond can be calculated using the formula:

P = F / (1 + r)^n

where: P = price of the bond F = face value of the bond r = required rate of return n = number of years until maturity

In this case, F = $1,000, r = 10.4% or 0.104, and n = 10 years.

Substituting these values into the formula gives:

P = $1,000 / (1 + 0.104)^10

Calculating this gives:

P = $1,000 / (2.714567482)

P = $368.2923

So, the current market price per bond would be approximately $368.2923.

This problem has been solved

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