You have just purchased a 12-year zero-coupon bond with a yield to maturity of 9% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 10% at the time you sell.

Question

Quizplus · Accepted Answer

If the yield to maturity on the bond increases to 10%, the bond's price will decrease. Using the formula for calculating a bond's price: 
Bond price = Par value / (1 + Yield to maturity)^Time to maturity 
The bond price would be: 
Bond price = $1,000 / (1 + 0.1)^12 
Bond price = $1,000 / 3.105 
Bond price = $321.95 
Therefore, if you sell the bond after one year, you would receive $321.95. 
Your rate of return would be: 
Rate of return = (Sale price - Purchase price) / Purchase price 
Rate of return = ($321.95 - $524.57) / $524.57 
Rate of return = -$202.62 / $524.57 
Rate of return = -0.386 or -38.6% 
Since the rate of return is negative, it means you would have a loss if you sell the bond after one year. Therefore, C is the correct choice, -1.4% is not a valid answer option.

You Have Just Purchased a 12-Year Zero-Coupon Bond with a Yield