Question

An investor purchases a bond that does not pay a coupon (zero-coupon) with a face value of $5,000. Assume the bond’s 8.4% yield to maturity is expected to remain constant over the duration of the bond’s life. What is the rate of return on his investment, if he sells this bond ten years later?

Group of answer choices

Not enouh information to answer the question

4.20%

6.72%

5.04%

8.40%

Answer 1

Correct option is 8.40%

A zero-coupon bond is a bond where the face value is repaid at the time of maturity. As this does not carry any coupon interest , it YTM based on Current Bond selling price is equal to its return on Investment .

As Provided in the Question that the YTM will remain constant over the duration of bond . Hence as the YTM is constant , Rate of Return on Investment = Yield to Maturity = 8.40%