Question

You purchased a $1000 face value zero-coupon bond one year ago for $246.85. The market interest rate is now 6.81 percent. If the bond had 17 years to maturity when you originally purchased it, what was your total return for the past year? Assume semiannual compounding. Answer as a percentage to two decimals (if you get -0.0435, you should answer -4.35).

Answer 1

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Answer:

Price of zero coupon bond = Face value / (1 + t)^n

Face value = $1000

t = periods to maturity = (17 -1) *2 = 32

n = 6.81%/2 = 3.405%

Price of zero coupon bond at year end = 1000 / (1.03405)^32 = $342.508

Cost of bond = $246.85

Total return in dollars = $342.508 - $246.85 = $95.658

Total return for past year = $95.658 / $246.85 * 100

= 38.75%