Bond types and valuation A zero-coupon bond pays $1,000, 10 years from today, but it pays no interest between now and then.

a. If you require a 5% return on such a bond, what would you be willing to pay for it today?

b. Suppose you bought the bond in part (a) and held it for a year. Now you want to sell. Assuming that the required return on the bond is still 5%, what price do you expect to receive when you sell the bond?

c. Comparing the price you paid in part (a) to the price you received in part (b), what rate of return did you earn during the one year that you held this bond?

d. Suppose instead that when you are ready to sell after holding the bond for a year, the required return has fallen to 4%. What price will you receive when you sell the bond and what rate of return did you earn for the year? Explain why your answer here is different than in parts (b) and (c).