Compute the yield on debt given a 10-year zero-coupon bond paying $500 at maturity.Assume the asset value is $450,σ = 0.35,r = 0.06,and no dividend is paid.
A) 6.62%
B) 7.26%
C) 8.26%
D) 9.62%

Question

Quizplus · Accepted Answer

The yield on a zero-coupon bond is calculated using the formula: Yield = [(Face Value / Present Value)^(1/n)] - 1. Here, Face Value = $500, Present Value = $450, and n = 10 years. Plugging in the values: Yield = [($500 / $450)^(1/10)] - 1 = 0.0826 or 8.26%.

Compute the Yield on Debt Given a 10-Year Zero-Coupon Bond