A zero-coupon bond doesn't pay periodic interest, but instead is sold at a discount and grows to its face value (or par value) at maturity. The amount Andrew pays initially for this bond can be calculated using the present value formula:

$\text{Price} = \frac{\text{Par Value}}{(1 + \text{Yield})^{\text{Years}}}$

Given Information:

• Par Value = $1,000
• Yield to Maturity = 8% (0.08 as a decimal)
• Maturity = 16 years

Calculation:

$\text{Price} = \frac{1,000}{(1 + 0.08)^{16}}$ $\text{Price} = \frac{1,000}{(1.08)^{16}}$ Calculating $(1.08)^{16}$: $(1.08)^{16} \approx 3.5184$ $\text{Price} \approx \frac{1,000}{3.5184} \approx 284.26$

So, Andrew pays approximately $284.26 for the bond.

Money Made at Maturity:

At maturity, the bond reaches its par value of $1,000, so the profit Andrew makes is:

$\text{Profit} = \text{Par Value} - \text{Purchase Price}$ $\text{Profit} = 1,000 - 284.26 = 715.74$

Answer:

Andrew makes approximately $715.74 if he holds the bond to maturity.

Would you like more details or have any questions?

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Here are some related questions to deepen your understanding:

1. What would happen to Andrew's profit if the yield to maturity was higher?
2. How does compounding frequency affect the price of a zero-coupon bond?
3. What is the difference in profit if the maturity period is reduced?
4. How would semi-annual compounding change the initial purchase price?
5. What are the risks associated with zero-coupon bonds for investors?

Tip: A higher yield decreases the bond's initial purchase price, increasing the potential profit at maturity.