Answer-first summary for fast verification
Answer: $786
For a zero-coupon bond, the bankruptcy claim is the bond’s **accreted value** at the time of bankruptcy, using the same yield. - Original price = **$708.92** - Semi-annual yield = **7.0% / 2 = 3.5%** per half-year - Time elapsed = **1.5 years = 3 half-year periods** Accreted value: \[ 708.92 \times (1.035)^3 \approx 708.92 \times 1.1087 \approx 785.95 \] Nearest amount = **$786**. **Correct answer: C**
Author: Manit Arora
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Question 1.1.
A corporate zero-coupon bond with a face value of $1,000 was issued in January 2010 with an original maturity of five (5) years. The offering price was $708.92 based on semi-annual discounting of a 7.0% yield. In July 2011, 1.5 years after issuance, the issuer files for bankruptcy. If the yield is unchanged, which of the following is nearest to the amount that can be claimed by the bond creditor?
A
$709
B
$759
C
$786
D
$1,000
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