
Explanation:
Since the zero-coupon bond is compounded continuously, the future value of this 7-year, 9% per annum bond is calculated using the continuous compounding formula:
The formula for continuous compounding is , where is the mathematical constant approximately equal to 2.71828, is the continuously compounded rate, and is the time period in years. Applying this to the zero-coupon bond gives a future value of $1,877.6, which matches option C.
Q.653 An investor has invested $1,000 in a 7-year zero-coupon bond with continuous compounding. If the bond is quoted as 9% per year compounded continuously, then estimate the value of the investment at the end of 7 years.
A
The future value of a zero-coupon is $1,656.0.
B
The future value of a zero-coupon is $1,828.0.
C
The future value of a zero-coupon is $1,877.6.
D
The future value of a zero-coupon is $1,912.0.
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