: Northrop Real Estate Company is planning to fund a development proje

QUESTION

: Northrop Real Estate Company is planning to fund a development project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding, what will be the price of these bonds if the appropriate discount rate is 14 percent?
Face value of the bond= $1000 Coupon interest rate= 0% So coupon payments would be =0%*1000= 0 Time horizon= 10 yrs Time horizon (semi annual) = 10*2= 20 yrs Discount rate is 14% p.a. so semi annually it would be 7% Price of the bond would be= Coupon interest PVIFA (20yrs, 7%) + Face Value of bond PVIF¦

rs, 7%) Or, price of the bond would be= 0 PVIFA (20yrs, 7%) + 1000/ (1+.07) ^20 Or, Price of the bond would be= 0 + $258.42 = $258.42 Therefore price of the bond of Northrop Real Estate Company would be $258.42

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