Suppose you invest in zero coupon bonds and you are looking at a five-year zero-coupon that...

Suppose you invest in zero coupon bonds and you are looking at a five-year zero-coupon that matures on 2/22/2019, and which you want to buy on 2/22/2018. It has a face value of $1,000, and its price is $990.10. If the one-year risk-free rate is 2%, what is the bond’s YTM?

Expert Solution

Zero Coupon Bond year to Maturity (from 2/22/2018to 2/22/2019) n= 1

Face Value Of bond = 1000

Bond Price = 990.1

YTM of Zero Coupon Bond = ((face Value/Bond Price)^(1/n))-1

=((1000/990.1)^(1/1))-1

=0.009998990001 or 1%

So bond YTM is 1%

jeff jeffy answered 2 years ago

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