The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. $$\begin{array} { | l | l | }
\hline \text { Maturity (Years) } & \underline { \text { Price } } \
\hline 1 & \$ 943.40 \
\hline 2 & \$ 881.68 \
\hline 3 & \$ 808.88 \
\hline 4 & \$ 742.09 \
\hline
\end{array}$$
-What is the yield to maturity on a 3-year zero coupon bond?
A)6.37%
B)9.00%
C)7.33%
D)10.00%
E)none of the above

Question

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. $$\begin{array} { | l | l | } 
\hline \text { Maturity (Years) } & \underline { \text { Price } } \
\hline 1 & \$ 943.40 \
\hline 2 & \$ 881.68 \
\hline 3 & \$ 808.88 \
\hline 4 & \$ 742.09 \
\hline
\end{array}$$
-What is the yield to maturity on a 3-year zero coupon bond?
A)6.37%
B)9.00%
C)7.33%
D)10.00%
E)none of the above

Quizplus · Accepted Answer

To find the yield to maturity, we need to solve for the interest rate, which is the rate of return that equates the present value of the bond's cash flows (the prices of the zero coupon bond) with the bond's price. Using financial calculator or spreadsheet software, we can compute the yield to maturity for the 3-year zero coupon bond as follows:

PV = -808.88 (the price of the 3-year zero coupon bond)
FV = 1000 (the par value of the bond)
N = 3 (the number of years to maturity)
PMT = 0 (no coupon payments, since it's a zero coupon bond)
Solving for I/Y, we get I/Y = 7.33%, which is the yield to maturity for the bond. Therefore, the answer is C.

The Following Is a List of Prices for Zero Coupon