Question

Assume a zero-coupon bond that sells for $305 and will mature in 20 years at $2,050. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

What is the effective yield to maturity?
Note: Assume annual compounding. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

Answer 1

The effective yield to maturity of the zero-coupon bond is 5.72%.

Step-by-step explanation:

The effective yield to maturity can be calculated using the formula:

Yield to Maturity = (Face Value - Purchase Price) / Purchase Price

In this case, the face value of the bond is $2,050 and the purchase price is $305. Plugging these values into the formula gives us:

Yield to Maturity = ($2,050 - $305) / $305

= 5.72

Therefore, the effective yield to maturity is 5.72%.