1215

What is the yield to maturity (YTM) of a 20-year, U.S. zero-coupon bond selling for $300?

A) 7.20%.

B) 6.11%.

C) 3.06%.

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N = 40; PV = 300; FV = 1,000; CPT → I = 3.055 × 2 = 6.11.

1215

What is the value of a zero-coupon bond if the term structure of interest rates is flat at 6% and the bond has two years remaining to maturity?

A) 83.75.

B) 100.00.

C) 88.85.

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The bond price is computed as follows:

Zero-Coupon Bond Price = 100/1.03⁴ = 88.85.

The value 83.75 is incorrect because the principal is discounted over a three-year period but the bond has only two years remaining to maturity. The value 100.00 is incorrect because the principal received at maturity has to be discounted over a period of two years.

1215

What would an investor pay for a 25-year zero coupon bond if they required 11%? (Assume semi-annual compounding.)

A) $1,035.25

B) $68.77

C) $103.53

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N = 50, I/Y = 5.5, PMT = 0, FV = 1,000
CPT PV = 68.77

1215

The value of a 10-year zero-coupon bond with a $1,000 maturity value, compounded semiannually, and has an 8% discount rate is closest to:

A) $200.00.

B) $463.19.

C) $456.39.

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V = (maturity value)/(1 + i)^{number of years x 2} = $1,000/(1.04)^{10 x 2} = $1,000/2.1911 = $456.39

or

n = 20, i = 4, FV = 1,000, compute PV = 456.39.