Suppose you bought a five-year zero-coupon Treasury bond for $800 per $1000 face value. Answer the below
Question:
Suppose you bought a five-year zero-coupon Treasury bond for $800 per $1000 face value.
Answer the below questions:
(a) What is the yield to maturity (annual compounding) on the bond?
b) Assume the yield to maturity on comparable bonds increases to 7% after you purchase the bond and remains there. Calculate your holding period return (annual return) if you sell the bond after one year.
(c) Assuming yields to maturity on comparable bonds remain at 7%, calculate your holding period if you sell the bond after two years. Suppose after 3 years, the yield to maturity on comparable bonds declines to 3%.
(d)Calculate the holding period return if you sell the bond at that time.
(e) If the yield remains at 3%, calculate the holding period after four years.
(f) If the yield remains at 3%, calculate the holding period after five years.
(g) What explains the relationship between holding period returns calculated in (b) through (f) and the yield to maturity in (a)?
Expert Answer:
a To calculate the yield to maturity on the bond we need to solve for the interest rate that equates the present value of the bonds cash flows to its purchase price In this case the bond has a face va... View the full answer
