If a zero-coupon bond with a face value of $1,000 costs $800,then the rate of return if held to maturity would be:
A) -20%.
B) 20%.
C) -25%.
D) 25%.

Question

Quizplus · Accepted Answer

The rate of return of a zero-coupon bond is calculated using the following formula:

Rate of return = (Face value / Bond price)^(1/n) - 1

where n is the number of years until maturity.

In this case, the face value is $1,000 and the bond price is $800, so the rate of return would be:

Rate of return = ($1,000 / $800)^(1/1) - 1 = 0.25 or 25%

Therefore, the correct answer is D) 25%.

If a Zero-Coupon Bond with a Face Value of $1,000