Question

Four zero-coupon bonds each will pay $1,000 at maturity. The bonds mature in either 10 years or 20 years, and have a price today of either $300 or $500. The bond with the largest yield to maturity is the bond that has the
A. $300 price and matures in 10 years.
B. $500 price and matures in 20 years.
C. $300 price and matures in 20 years.
D. $500 price and matures in 10 years.​

Answer 1

Answer:

The correct answer is Option A

Explanation:

The Zero-coupon bonds are issued at a discount and redeemable at par value. The difference between the two is Yield to maturity. Thus, bond with lower short term maturity and lower price would have highest yield to maturity. Some bonds are issued as zero-coupon instruments from the start, while other bonds transform into zero-coupon instruments after a financial institution strips them of their coupons, and repackages them as zero-coupon bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price, much more so than coupon bonds' bond is a portal through which a corporate or governmental body raises capital. When bonds are issued, investors purchase those bonds, effectively acting as lenders to the issuing entity. The investors earn a return in the form of coupon payments, which are made semiannually or annually, throughout the life of the bond.

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