Suppose that there are three zero coupon bonds with maturity date 1 year, 2 year and 3 year respectively. The current price of the 1 year, 2 year and 3 year bonds respectively are $826.45, $718.18 and $640.66 respectively. The yield to maturity of the first year bond is:
A) 21%.
B) 18%.
C) 12%.
D) 11%.

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) for a zero-coupon bond is calculated using the formula: YTM = [(Face Value / Present Value)^(1/n)] - 1. Assuming a face value of $1000, for the 1-year bond: YTM = [(1000 / 826.45)^(1/1)] - 1 = 0.21 or 21%.

Suppose That There Are Three Zero Coupon Bonds with Maturity