You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11% 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 9% at the time you sell.

Question

Quizplus · Accepted Answer

To calculate the rate of return, we need to use the formula:

Rate of return = ((selling price/purchase price)^(1/n)) - 1

Where,
n = number of years held

Since the bond is a zero-coupon bond, the purchase price is the present value of the bond, which is:

Purchase price = (par value / (1 + yield to maturity)^n)

= (1000 / (1 + 0.11)^7)
= 382.28

The selling price can be calculated in a similar way, using the new yield to maturity rate of 9%:

Selling price = (1000 / (1 + 0.09)^7)
= 553.68

Using these values, we can calculate the rate of return:

Rate of return = ((553.68/382.28)^(1/7)) - 1
= 23.8%

Therefore, the answer is B.

You Have Just Purchased a 7-Year Zero-Coupon Bond with a Yield