Suppose that you have purchased a 3-year zero-coupon bond with face value of $1000 and a price of $850. If you hold the bond to maturity, what is your annual return?
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Annual Return is 5%
Given
Face value of bond = $1000
price of bond = $ 850
Life of the bond = 3 years
To Find
Annual Return
Solution
We have
Face value of bond = $1000
price of bond = $ 850
Profit = 1000 - 850 =$ 150
Total Return over the life of bond =
= 15% over a period of 3 years
Annual Return = 15% ÷ 3
= 5%
Thus Annual Return is 5%
#SPJ2
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