coupons

smileyface5 · #1 $Old$ June 26th, 2009, 02:43 PM

what is the price of a five year, zero coupon, default free security with a face value of $1000

TKHunny · #2 $Old$ June 26th, 2009, 07:06 PM

Is there an expected return or is this just stuffing it in a matress?

LochWulf · #3 $Old$ June 27th, 2009, 03:56 PM

$1,000(1 + r)^{-5}$ ... where r is your risk-free rate (expressed as an annual rate), will price the zero for ya.

This assumes annual compounding; if your risk-free rate is given to you in a form that contemplates a different compounding period, you'll have to adjust the pricing formula accordingly.

Cheers!