A zero coupon bond is a bond that pays no return until it comes due and then pays the holder of the bond its face value.Suppose that a $4,000 zero coupon bond will come due on January 1, 2020.If the interest rate is 5% and will remain 5% forever, what will this bond be worth on January 1, 2005?

A) $4,000/0.05
B) $4,000/0.05¹⁵
C) $4,000  4,000/15
D) $4,000  1.05¹⁵
E) None of the above.

Zero Coupon Bond

A debt security that does not pay interest but is traded at a deep discount, offering profit at maturity when it is redeemed for its face value.

Face Value

The nominal value printed on a financial instrument like a bond or stock certificate, not necessarily its market value.

Interest Rate

The interest rate is the proportion, typically expressed as a percentage, at which interest is paid by borrowers for the use of money that they borrow from a lender.