Question

A zero-coupon bond with face value $1,000 and maturity of five years sells for $741.22. a. What is its yield to maturity

Answer 1

Answer:

A. 6.17%.

B. 6.64%.

Explanation:

a. Calculation to determine What is its yield to maturity

Using financial calculator

PV = - 741.22

FV = 1,000

n = 5 years

PMT = 0

YTM?

Hence,

YTM = 6.17%.

Therefore is its yield to maturity is 6.17%

b. Calculation to determine What will the yield to maturity be if the price falls to $725

Using financial calculator

PV = - 725.00

FV = 1,000

n = 5 years

PMT = 0

YTM?

Hence,

YTM = 6.64%

Therefore What will the yield to maturity be if the price falls to $725 is 6.64%

Answer 2

Answer:

a. 6.17%

b. 6.49%

Explanation:

Missing word "b. What will happen to its yield to maturity if its price falls immediately to $730"

a. Yield to Maturity = (Face Value / Current Price of Bond) ^ (1 / Years to Maturity) - 1

Yield to Maturity = (1000 / 741.22)^(1 / 5) - 1

Yield to Maturity = 1.06172 - 1

Yield to Maturity = 0.06172

Yield to Maturity = 6.17%

b. Yield to Maturity = (Face Value / Current Price of Bond) ^ (1 / Years to Maturity) - 1

Yield to Maturity  = (1000/730)^(1 / 5) - 1

Yield to Maturity = 1.0649 - 1

Yield to Maturity = 0.0649

Yield to Maturity = 6.49%