Computaion of yield to maturity on bond

Reference no: EM1311252

Suppose you buy a five-year zero-coupon Treasury bond for $800 per $1000 face value.

Assume annual compounding throughout the problem. Answer the following questions-

(a) What is the yield to maturity on the bond?

(b) Assume the yield to maturity on comparable zeros increases to 7% immediately after pur¬chasing the bond and remains there. Calculate your annual return (holding period yield) if you sell the bond after one year.

(c) Assume yields to maturity on comparable bonds remain at 7%, calculate your annual return if you sell the bond after two years.

(d) Suppose after three years, the yield to maturity on similar zeros declines to 3%. Calculate the annual return if you sell the bond at that time.

(e) If the yield to maturity remains at 3%, calculate your four-year annual return (you sell the bond after four years).

(f) Calculate your five-year annual return.

(g) What relationship do you observe between annual returns calculated in (lb) through (If) and the yield to maturity in (la)?

Reference no: EM1311252

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