Given that the risk-free rate of return is 5%, what is the value of a zero-coupon bond with a principal payment of $15,000 in 15 years, and a risk-premium of 5%?
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A. B. C. D. E. F.B
The value of a zero-coupon bond is the present value of its principal payments. The required rate of return is the risk-free rate of return plus the risk premium (5 +
5 = 10%). Using appendix C in the book by Reilly & Brown, the present value of the bond is $15,000 x 0.2394 = $3,591, or $15,000/(1.1^15).