Question

1. Suppose that you can purchase a 10-year zero-coupon note (STRIP) offered by the U.S. Treasury with a par value of $1,000. Using annual compounding, a. What is the price if the market yield is 2.50%? b. What would the price be one year later if the market yield remains the same? c. What is your holding period return for the one-year period? d. What can you conclude about how you earn a return on a zero-coupon bond over time?

Answer 1

Holding period return:

= ($800.73-$781.20)/$781.20

= 2.50%

For zero coupon bonds, yield curve will be flat. Regardless of the holding period, investor yield will be same. Yield is 2.50%.