Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity. If the bond is currently trading for $459, then the yield to maturity on this bond is closest to:a.9%b.7.5%.c.10.4%.d.8.1%.e.9.7%.
Question
Consider a zero-coupon bond with a 459, then the yield to maturity on this bond is closest to:a.9%b.7.5%.c.10.4%.d.8.1%.e.9.7%.
Solution
The correct answer is e. 9.7%.
The yield to maturity (YTM) of a zero-coupon bond can be calculated using the formula:
YTM = [(Face Value / Price)^(1/n)] - 1
where n is the number of years until maturity.
In this case, the face value is 459, and n is 10 years.
So, the YTM is [(1000 / 459)^(1/10)] - 1 = 0.097 or 9.7%.
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