Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period?
A) Since interest rates will rise and fall in response to the movement in bond prices.
B) Since a bond's price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence.
C) Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period.
D) Since such a bond provides a risk-free return over that period, the Law of One Price guarantees the
Risk-free interest rate be equal to this yield.
Correct Answer:
Verified
Q2: The only cash payment an investor in
Q12: Which of the following is true about
Q13: How are the cash flows of a
Q15: Use the figure for the question(s)below.
Q16: How are investors in zero-coupon bonds compensated
Q18: What is the yield to maturity of
Q19: A bond certificate indicates
A)the yield to maturity
Q20: By convention, the coupon rate is expressed
Q21: Consider a zero-coupon bond with $1 000
Q22: Use the figure for the question(s)below.
Unlock this Answer For Free Now!
View this answer and more for free by performing one of the following actions
Scan the QR code to install the App and get 2 free unlocks
Unlock quizzes for free by uploading documents