Suppose a friend of yours purchases a zero coupon bond for Rs214.55 with a face value of
Rs1,000 maturing in twenty years. If the yield to maturity (YTM) on the bond remains
unchanged, what will the price of the bond be at the end of five years from now?
+80 Since it's a zero coupon bond, there's no interest rate. But you can only cash it out after 20 years to make up for that interest. We already know you can only cash that bond out after 20 years. The growth should be linear.
The US Treasury states that:
However, if you hold the bond to its 20-year maturity, your return will jump considerably to a compounded rate of return of roughly 3.5% per year. This is because the U.S. Treasury guarantees that an investment in a Series EE bond will double in value after 20 years.
3.5% per year. We'll assume that you this zero interest bond grows according to the normal interest rate.
Use the equation A = P(1 + rt), and figure it out.
Also, since you're using Rupees as your currency, maybe you need to convert to USD or Euros.
1 - Since we know the bond's price, its maturity and its par value at maturity, we can easily figure the yield to maturity, at which it was purchased, like this:
2 - [1,000 / 214.55]^(1/20) ==1.08 - 1 x 100 ==8% -bond's yield to maturity
3 - Will use this simple FV formula to find its value 5 years from now: FV ==PV x [1 + R]^N ==214.55 x 1.08^5 ==214.55 x 1.4693280768 ==Rs 315.24 - bond's value 5 years from now.
