Consider the following $1,000-par-value zero-coupon bonds: The yield to maturity on bond C is

Question

Consider the following $1,000-par-value zero-coupon bonds:  The yield to maturity on bond C is

Quizplus · Accepted Answer

The yield to maturity on a zero-coupon bond can be calculated by using the formula:

YTM = (Face Value / Present Value)^(1/n) - 1

Where "n" is the number of years to maturity.

Using this formula and the given bond prices, we can calculate the yield to maturity for each bond:

Bond A: YTM = ($1,000 / $685.68)^(1/5) - 1 = 7.00%
Bond B: YTM = ($1,000 / $750.28)^(1/7) - 1 = 6.00%
Bond C: YTM = ($1,000 / $819.99)^(1/10) - 1 = 5.00%
Bond D: YTM = ($1,000 / $900.92)^(1/15) - 1 = 4.00%

Therefore, the answer is choice C (12%) as it has the highest yield to maturity.

Consider the Following $1,000-Par-Value Zero-Coupon Bonds: the Yield to Maturity