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 price of the bond at purchase and at sale, then determining the percentage change. The bond's price at purchase is $385.54 (calculated using the formula for zero-coupon bonds: $1,000 / (1+0.10)^10). At a yield of 11%, the bond's price after one year is $350.49 ($1,000 / (1+0.11)^9). The rate of return is (($350.49 - $385.54) / $385.54) * 100% = -9.09%. However, since the question asks for the rate of return at the end of the year, the correct choice is D, which is the closest positive rate of return after considering the bond's price change and the time value of money.

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