Question

If you purchase a 5-year, zero-coupon bond for $800 (with face value of $1,000),
a) What is the yield of the bond?
b) How much could it be sold for 3 years later if the interest rates have remained stable?
c) How much would it be sold for 3 years later if the interest rates of year 4 and year 5 change to 5%?

Answer 1

A

Face value of bond =$1000

Price of Bond = $800

Number of years to Maturity (n)= 5

Yield of zero Coupon Bond = ((face value/bond price)^(1/n))-1

=((1000/800)^(1/5))-1

=0.04563955259 or 4.56%

So yield of Bond is 4.56%

B.

After 3 years, Yield (I)= 0.04563955259

Years left to Maturity (n)= 5-3= 2

Bond price of zero Coupon Bond = face value/(1+I)^n

=1000/(1+0.04563955259)^2

=914.6101039

Price of Bond after 3 years will be $914.61

C

After 3 years, Yield (I)= 0.04563955259

Years left to Maturity (n)= 5-3= 2

Bond price of zero Coupon Bond = face value/(1+I)^n

=1000/(1+0.04563955259)^2

=914.6101039

Price of Bond after 3 years will be $914.61

C.

After 3 years, Yield (I)= 0.04563955259

Years left to Maturity (n)= 5-3= 2

Bond price of zero Coupon Bond = face value/(1+I)^n

=1000/(1+0.04563955259)^2

=914.6101039

Price of Bond after 3 years will be $914.61

C.

After 3 years, Yield (I)= 0.04563955259

Years left to Maturity (n)= 5-3= 2

Bond price of zero Coupon Bond = face value/(1+I)^n

=1000/(1+0.04563955259)^2

=914.6101039

Price of Bond after 3 years will be $914.61

C.

After 3 years, Yield (I)= 5%

Years left to Maturity (n)= 5-3= 2

Bond price of zero Coupon Bond = face value/(1+I)^n

=1000/(1+5%)^2

=907.0294785

So bond price is $907.03 after 3 years