Question

There is a zero coupon bond that sells for $414.68 and has a par value of $1,000. If the bond has 14 years to maturity, what is the yield to maturity? Assume semiannual compounding.

Answer 1

Given:

Present Value (PV)= $414.68

Future Value (FV)=$1,000

Time period= 14 years*2= 28, to account for the semi-annual period.

Formula for computing the yield to maturity:

Present Value (PV)=PMT/(1+r)^t+ FV/(1+r)^t

Yield to maturity is calculated by applying substitution in the above formula.

This can also be solved using a financial calculator by inputting the below into the calculator:

FV= $1000; N= 28; PV=$414.68

Then press the I/Y button to get the yield to maturity.

The answer is 3.19*2= 6.38% per annum.

I hope that was useful :)