The one-year discount factor today is 0.95. You buy a one-year zero-coupon bond today and hold it until maturity. Suppose that at maturity, the one-year discount factor is 0.92. The return you realize, expressed in simple terms, is:
A) 3.43%
B) 5.26%
C) 8.69%
D) 9.50%

Question

The one-year discount factor today is 0.95. You buy a one-year zero-coupon bond today and hold it until maturity. Suppose that at maturity, the one-year discount factor is 0.92. The return you realize, expressed in simple terms, is: 
A) 3.43%
B) 5.26%
C) 8.69%
D) 9.50%

Quizplus · Accepted Answer

The return you realize is simply the difference in the discount factors, divided by the initial discount factor. So, the return is (0.95-0.92)/0.95 = 0.0316, or 3.16%. Expressed as a percentage, the answer is 5.26%, which is closest to answer choice B.

The One-Year Discount Factor Today Is 0