- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 2. Time Value of Money in Finance
- Subject 1. Time Value of Money
CFA Practice Question
What is the value of a zero-coupon bond that pays $1,000 in five years if the market rate for this security is 7%?
A. $ 712.99
B. $ 708.92
C. $ 735.43
Explanation: The present value of a payment received n years hence is given by: PV = FV / (1 + R)n
where: PV = present value, FV = future value, R = discount rate per period, n = # of periods
Therefore, the value of this bond is: PV = $ 1,000 / [1 + (0.07/2)]5 x 2 = $708.92.
Note that the semi-annual compounding should be assumed if this element is not specified.
User Contributed Comments 12
| User | Comment |
|---|---|
| whoi | "note that the semi-annual compounding should be assumed if not specified" => Bloody american rules everywhere! |
| charlie | because CFA Institute is in the US, and you are trying to get an American designation. |
| surob | it is not an american designation. it is worldwide one. :) |
| chamad | BAII 1000FV, N=10,, I=3.5-----CPT PV=708.91 |
| aakash1108 | This is a classic example of "Bond Market returns". |
| aakash1108 | i think if we read Financial Statement onwards, we'd be able to interpret the question better! |
| Photon | Isn't the correct calculation, FV= 1000 Interest= 7% n =10 and pmt=0. Doing what is written above gives a PV of 840.73 on my calculator |
| Photon | Is it just a rule related to Bonds that we use semi annual compounding, as ordinatirly you would assume an annual interest rate if unspecified |
| RAustin | Semi-annual compounding for zero coupon bonds (no coupon)? |
| mbowa | Photon, i was getting the same amount until i adjusted my calculator back to 1 period, then you get 708.9188 |
| Lambo83 | You definitely shouldn't assume semi-annual compounding unless it's a US Treasury. In the exam it will definitely be made clear. |
| sevywonder | @Lambo83 @whoi right, the less you assume the better, no matter what |