What is the yield to maturity of a 3-year zero-coupon bond? Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lr}
& \text { Forward } \
\text { Year } & \text { Interest Rate } \
\hline 0 & \text { (today) } 3 \% \
1 & 4 \% \
2 & 5 \% \
3 & 6 \%
\end{array}$
A) 7.00%
B) 9.00%
C) 6.99%
D) 4.00%
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) of a zero-coupon bond is the geometric average of the forward rates over its life. For a 3-year bond, YTM = [(1+0.03)(1+0.04)(1+0.05)]^(1/3) - 1 = 4.00%.

What Is the Yield to Maturity of a 3-Year Zero-Coupon