Suppose you bought a five-year zero-coupon Treasury bond for $800 per $1000 face value. What is the yield to maturity (annual compounding) on the bond?
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Explanation:
Annual return on a zero is the same as the holding period return and is given by:HPR =±Pt0P²1t0-1wherePt0is the selling price of the bond andt0is the number of years the bond is held.This bond must also yield 7% to those you sell it to after one year. Using the formulafor the price of a zero and recalling that the 5-year bond becomes a 4-year bond afterone year, we have:Pt0=$1000(1 +.07)4= $762.90Therefore, the annual return when you sell this bond after one year assuming yieldshave increased to 7% is:HPR =$762.90$800-1 =-0.0464Your return is less than the YTM because yields rose and...
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Answer:
0.0456
Explanation:
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