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Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 6%. You hold the...

Question:

Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 6%. You hold the bond for five years before selling it.

a) If the bond's yield to maturity is 6% when you sell it, what is the rate of return of your investment?

b) If the bond's yield to maturity is 7% when you sell it, what is the rate of return of your investment?

c) If the bond's yield to maturity is 5% when you sell it, what is the rate of return of your investment?

d) Even if a bond has no chance of default, is your investment risk free if you plan to sell it before it matures? Explain.

Zero-Coupon Bond:

As the name suggests, zero-coupon bonds do not pay any coupon to the bondholder. Zero-coupon bonds trade at a discount and the investor receives the face value of the bond at the time of maturity.

Answer and Explanation:

Let assume the Bonds be 100

a)

n = 30 years:

{eq}Purchase \ price \ = \ \dfrac{100}{\left ( 1 \ + \ YTM \right )^{n}} \\ Purchase \ price \ = \...

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Zero Coupon Bond: Definition, Formula & Example

from Financial Accounting: Homework Help Resource

Chapter 6 / Lesson 25
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