Question

Consider the special case of a zero coupon bond (a bond with 0% coupon rate). If the bond makes a single payment of face (par) value of $1000 in period five at maturity, what is the yield (to maturity) on the bond if it is trading at a price of $900? (enter your answer rounded to two decimal places - for example, an answer of 5.32% should be entered as .05)

Answer 1

A Zero-Coupon Bond is one that has no periodic interest payments from the date of issuance until maturity and is priced at a discount to the face (par) value.

What is a zero-coupon bond's yield to maturity?

Zero-coupon bonds always show yields to maturity equal to their normal rates of return, even when no interest is taken into consideration. The spot rate is another name for the zero-coupon bond yield to maturity.

How is the interest rate on a bond with a zero coupon determined?

To determine a bond's yield-to-maturity (YTM), first divide the bond's face value (FV) by its present value (PV). The number of compounding periods is divided by one, and the result is then raised to the power of one.

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