- 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

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**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.

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**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 |