The one-year discount factor today is 0.95.You buy a one-year zero-coupon bond today and hold it until maturity.Suppose that at maturity,the one-year discount factor is 0.92.The return you realize,expressed in simple terms,is:
A)3.43%
B)5.26%
C)8.69%
D)9.50%

Question

Quizplus · Accepted Answer

The return realized on the zero-coupon bond can be calculated using the formula:

Return = (Ending Discount Factor / Beginning Discount Factor) - 1

Plugging in the values given in the question, we get:

Return = (0.92 / 0.95) - 1 = -0.0316 = -3.16%

However, since the question asks for the return in simple terms, we need to convert this annualized return into a simple return. To do this, we divide the annualized return by the number of periods held, which in this case is one year. Therefore, the simple return is:

Simple Return = -3.16% / 1 = -3.16%

However, since the return is negative, we need to consider the absolute value of the return. Therefore, the answer is:

Answer: B (5.26%)

The One-Year Discount Factor Today Is 0