Consider the following $1,000 par value zero-coupon bonds: $$\begin{array} { l | l | l | }
\underline { \text { Bond } } & \underline { \text { Years to Maturity } } & \underline { \text { Price } } \
\hline \mathrm { A } & \mathbf { 1 } & \$ 909.09 \
\hline \mathrm { B } & 2 & \$ 811.62 \
\hline \mathrm { C } & 3 & \$ 711.78 \
\hline \mathrm { D } & 4 & \$ 635.52 \
\hline
\end{array}$$
-The yield to maturity on bond D is _______.

Question

Consider the following $1,000 par value zero-coupon bonds: $$\begin{array} { l | l | l | } 
\underline { \text { Bond } } & \underline { \text { Years to Maturity } } & \underline { \text { Price } } \
\hline \mathrm { A } & \mathbf { 1 } & \$ 909.09 \
\hline \mathrm { B } & 2 & \$ 811.62 \
\hline \mathrm { C } & 3 & \$ 711.78 \
\hline \mathrm { D } & 4 & \$ 635.52 \
\hline
\end{array}$$
-The yield to maturity on bond D is _______.

Quizplus · Accepted Answer

We can use the formula for calculating yield to maturity:

Price = \dfrac{1000}{(1+y)^n}

where y is the yield to maturity and n is the number of years to maturity.

For bond D, we have:

$635.52 = \dfrac{1000}{(1+y)^4}$

Solving for y, we get:

(1+y)^4 = \dfrac{1000}{635.52}

1+y = (1000/635.52)^(1/4)

y = (1.1567)^3 - 1

y = 0.12 or 12%

Therefore, the yield to maturity on bond D is 12%.

Consider the Following $1,000 Par Value Zero-Coupon Bonds -The Yield to Maturity on Bond D Is _______