Question

A zero-coupon bond with a face value of $1,000 and maturity of eight years sells for...

A zero-coupon bond with a face value of $1,000 and maturity of eight years sells for $435. What is its yield to maturity? Answer in percentages and use two decimal places

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Homework Answers

Answer #1

Formula:

Yield to maturity=

(Face Value/Current price of the bond) ^ (1/years to maturity) - 1

Given,

Face value= $1,000

Current bond price= $435

Years to maturity (n) = 8

Yield to maturity= (1000/435)^(1/8)-1

= (2.30)^(1/8)-1

= 11%

Comment:

The yield to maturity is the overall return the bond investor makes if they purchased the bond today and held it to maturity.

A rise in bond price will decrease the yield and a fall in bond price will increase the yield. Yield of a bond is inversely related to its price.

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