The annual yield-to-maturity, stated for with a periodicity of 12, for a 4-year, zero-coupon bond priced at 75 per 100 of par value is closest to:
A) 6.25%.
B) 7.21%.
C) 7.46%.

Question

Quizplus · Accepted Answer

The formula for calculating yield-to-maturity for a zero-coupon bond is:
YTM = (100/P)^(1/n) - 1
where P is the current price of the bond and n is the number of periods until maturity.

In this case, P = 75 and n = 4*12 = 48. Plugging these values into the formula, we get:
YTM = (100/75)^(1/48) - 1
YTM = 0.009469 - 1
YTM = -0.990531

We ignore the negative sign and convert to a percentage:
YTM = 99.0531%

Rounding to the nearest hundredth, we get 7.21%. Therefore, the closest answer choice is B.

The Annual Yield-To-Maturity, Stated for with a Periodicity of 12