A five-year zero coupon bond with a face value of $1,000 is currently selling for $826.50.Assume that coupon payments are normally semi-annual.What is the bond's YTM?

Question

Quizplus · Accepted Answer

The bond's yield to maturity (YTM) can be calculated using the formula for zero-coupon bonds: $ P = \frac{F}{(1 + r)^n} $, where $ P $ is the price ($826.50), $ F $ is the face value ($1,000), $ r $ is the semi-annual yield, and $ n $ is the number of periods (10 for 5 years with semi-annual compounding). Solving for $ r $ gives a semi-annual yield of approximately 1.92%, which annualizes to approximately 3.84%.

A Five-Year Zero Coupon Bond with a Face Value of $1,000