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

The price of the bond can be calculated using the formula:

Price = Par value / (1 + Yield to maturity) ^ Time period

Using the given information, we can calculate the price of the bond at the time of purchase:

Price = 1000 / (1 + 0.09) ^ 12 = $311.80

Now, if the yield to maturity increases to 10%, the price of the bond will decrease:

Price = 1000 / (1 + 0.10) ^ 12 = $294.03

The rate of return at the end of the year can be calculated as:

Rate of return = (Sale price - Purchase price) / Purchase price

Rate of return = ($294.03 - $311.80) / $311.80 = -0.057 or -5.7%

Therefore, the answer is C, -1.4%.

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