The price of a zero coupon bond is $747.27.
M = the date of maturity = $1,000
r = Interest Rate = 6%= 0.06
n= number of years =5 year
zero coupon bond: Price = [tex]M / (1 + r)^n[/tex]
= [tex]\frac{1000}{(1+0.06)^5}[/tex]
=$ 747.27
A zero-coupon bond also known as a cumulative bond, is a debt security that pays no interest but trades at a deep discount and produces a profit at maturity when the bond is redeemed at full value.
Some bonds are issued as zero-coupon instruments from the outset, while other bonds become zero-coupon instruments after the financial institution de-coupons them and repackages them as zero-coupon bonds. Because zero-coupon bonds offer full payment at maturity, they vary in price much more than coupon bonds.
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