CFA Practice Question

There are 410 practice questions for this study session.

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
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