Question

Question 1 Usually, Swiss government bonds pay coupons on annual basis. You are considering a 4- year Swiss government zero-coupon bond with a par value of CHF100.

a) Calculate the price for this bond using a -0.65% yield to maturity. Explain your answer and comment on the result. [9 marks]

b) What is the duration of this bond? [3 marks]

Answer 1

a) Using a financial calculator

FV = 100

N = 4

PMT = 0

I/Y = -0.65

CPT PV, we get

PV = -102.6428

Hence, the bond price = CHF 102.6428

The bond price is more than the maturity or the face value.

Since the yield is negative, the investor is earning a negative return by investing in the bond. This is because he is buying at a higher price and getting a lower price 4 years later.

b)

Duration of a zero-coupon bond equals its maturity period

Hence, duration = 4 years