A twenty-year zero coupon bond with a face value of $1,000 is currently selling for $326.50.What is the bond's yield-to-maturity (YTM)?

Question

Quizplus · Accepted Answer

The YTM is the rate of return that equates the present value of all future cash flows (coupons and principal repayment) with the current market price of the bond.

Since the bond is a zero coupon bond, there are no coupon payments, and the only cash flow is the face value received at maturity. Therefore, we need to find the discount rate that makes the present value of $1,000 equal to the current market price of $326.50, twenty years from now.

Using a financial calculator or Excel's RATE function, we find that the YTM is 5.68%. Therefore, the correct answer is B.

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