If you paid $6,000 for a two-year maturity bond with a face value of $8,640 and a zero percent coupon rate, what would be your rate of return?

Question

Quizplus · Accepted Answer

Since the bond has a zero percent coupon rate, the only return the investor will receive is the difference between the purchase price and the face value. Therefore, the return on investment can be calculated as follows:

Return on investment = (Face value - Purchase price)/Purchase price
Return on investment = ($8,640 - $6,000)/$6,000
Return on investment = $2,640/$6,000
Return on investment = 0.44 or 44%

However, this is the return over the life of the bond, which is two years. To find the annualized rate of return, the return needs to be divided by the number of years and expressed as a percentage:

Annualized rate of return = Return on investment/Number of years
Annualized rate of return = 0.44/2
Annualized rate of return = 0.22 or 22%

Therefore, the rate of return on the bond is 22%, which is closest to option B (20%).

If You Paid $6,000 for a Two-Year Maturity Bond with a Face