Adrienne Dawson is planning to buy 10-year zero coupon bonds issued by the U.S. Treasury. If...

Adrienne Dawson is planning to buy 10-year zero coupon bonds issued by the U.S. Treasury. If these bonds have a face value of $1,000 and are currently selling at $407.56, what is the expected return on them? Assume that interest compounds semiannually on similar coupon paying bonds. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) Effective rate of return

Solutions

Expert Solution

Face Value = $1,000
Current Price = $407.56

Time to Maturity = 10 years
Semiannual Period to Maturity = 20

Let semiannual YTM be i%

$407.56 = $1,000 * PVIF(i%, 20)

Using financial calculator:
N = 20
PV = -407.56
PMT = 0
FV = 1000

I = 4.59%

Semiannual YTM = 4.59%
Annual YTM = 2 * 4.59%
Annual YTM = 9.18%

jeff jeffy answered 2 years ago

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