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You buy a zero coupon bond that pays $6,000.00 in 11 year's time.If the interest rate is 10% per annum, how much should you pay for the bond today?Round your final answer to 2 decimal places. E.g. if the final answer is $12345.8342, please type 12345.83 in the answer box (do not type the dollar sign).

Question

You buy a zero coupon bond that pays 6,000.00in11yearstime.Iftheinterestrateis106,000.00 in 11 year's time.If the interest rate is 10% per annum, how much should you pay for the bond today?Round your final answer to 2 decimal places. E.g. if the final answer is 12345.8342, please type 12345.83 in the answer box (do not type the dollar sign).

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Solution

To calculate the price of a zero-coupon bond, we can use the formula for the present value of a single sum:

P = F / (1 + r)^t

where: P = price of the bond (the amount you should pay today) F = face value of the bond (the amount the bond pays at maturity) r = annual interest rate (in decimal) t = time until maturity in years

Given: F = $6,000.00 r = 10% per annum = 0.10 (in decimal) t = 11 years

Substituting these values into the formula:

P = $6,000 / (1 + 0.10)^11

Now, calculate the value inside the brackets:

= $6,

This problem has been solved

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