A ten-year, zero-coupon bond with a yield to maturity of 4% has a face value of $1000. An investor purchases the bond when it is initially traded, and then sells it four years later. What is the rate of return of this investment, assuming the yield to maturity does not change?
A) 3.20%
B) 2.40%
C) 4.00%
D) 2.00%

Question

Quizplus · Accepted Answer

The rate of return of this investment remains at 4% because the yield to maturity is assumed not to change over the period the bond is held. The yield to maturity is a fixed rate that determines the return on the bond if held to its maturity, and it does not change with the bond's price fluctuations in the market as long as the initial assumption of a constant yield holds true.

A Ten-Year, Zero-Coupon Bond with a Yield to Maturity of 4