In: Finance
Marriott Corporation’s $1,000 zero coupon debentures mature in 30 years. If they are priced to return 7.5 percent to the investor, what is the market price of one Marriott Corporation zero coupon debenture?
Given
Par value of the Zero Coupon bond = $ 1000
Rate of return = 7.5%
Maturity period = 30 Years
We know that redemption value of the Zero Coupon bond is nothing but the face value.
Hence the future value of the ZCB = $ 1000
Market price of a bond that the investors are willing to pay is nothing but the present value of future Cash flow
The only Cash flow in the Zero Coupon bond is the Redemption value.
We also know that Present value = Future Value / ( 1+i)^n
Here I = Rate of interest
n = No.of Years
Present value of Zero Coupon Bond ( ZCB) = $ 1000/ ( 1+0.075)^30
= $ 1000/ ( 1.075)^30
= $ 1000/8.754955
= $114.2210
Hence the Market price of a Zero Coupon Bond is $ 114.2210.