Tag (SQ): Zero coupon bond

(a) Calculate the value of the following bonds:

(i) a zero coupon bond redeemable at par in ten years’ time

(ii) a bond with an 8% coupon, with interest payable half-yearly, and redeemable at par after ten years.

Assume that the yield required by investors is 5%, and that this is 2.5% each half year for the purpose of valuing the 8% coupon bond.

(b) Calculate the value of both bonds in part (a) of the question if the yield required by investors goes up by 1%, to 6% for the zero coupon bond and 3% each half year for the 8% coupon bond.