 # Conept Checker ~ Zero coupon bond ~

Which of the following packages of securities is equivalent to a three-year 8 percent coupon bond with semi-annual coupon payments and a par value of 100? A three-year zero-coupon bond: A) with a par value of 150 and six 8% coupon bonds with a maturity equal to the time to each coupon payment of the above bond. B) with a par of 100 and three zero-coupon bonds with a par value of 4 and maturities equal to the time to each coupon payment of the coupon bond. C) with a par of 100 and six zero-coupon bonds with a par value of 8 and maturities equal to the time to each coupon payment of the coupon bond. D) with a par of 100 and six zero-coupon bonds with a par value of 4 and maturities equal to the time to each coupon payment of the coupon bond. Does “par value of 4”(option D) means 8%/2 ? thanks.

The answer would be D The payout for the bond is as below ( 8% is nnula coupon paymrnt) Year payout 0 .5 4 1 4 1.5 4 2 4 2.5 4 3 104 Thus D seems to be correct

For questions like this, draw a time line with the cash flows of the bond below each year, Then draw another time line with the other possibilities’ cash flows. And yes, the \$4 par value on the zeros equals the semiannual coupon payments of the original bond (1000 x 0.08)/2.

I agree with busprof. Drawing a time line with cash flows is very helpful. And of course D is the answer.

And how you know the concept of stripping a bond… hooray

D. 8/2=4 Thus 4 for 6 periods. and 100.