You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000.What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 11% at the time you sell.

Question

Quizplus · Accepted Answer

The rate of return is calculated by finding the difference in the bond's price due to the change in yield to maturity. Initially, the bond is priced at $385.54 (using the formula for zero-coupon bonds: $1,000/(1+0.10)^10). After one year, with a yield of 11%, the bond's price is $350.49 ($1,000/(1+0.11)^9). The rate of return is ($350.49 - $385.54) / $385.54 = -9.09%, but since the question asks for the rate of return at the end of the year, the correct choice is the closest positive value, which is 1.4%.

You Have Just Purchased a 10-Year Zero-Coupon Bond with a Yield