Question

There is a zero coupon bond that sells for 393.78 and has a par value of1,000. If the bond has 16 years to maturity, what is the yield to maturity? Assume semiannual compounding.

Answer 1

The yield to maturity of the zero coupon bond is approximately 2.5%.

Step-by-step explanation:

To calculate the yield to maturity (YTM) of the zero coupon bond, we can use the formula:

YTM = (Par Value / Present Value)^(1/n) - 1

Where:
- Par Value = $1,000
- Present Value = $393.78
- n = number of periods to maturity = 16 years * 2 (semiannual compounding) = 32 periods

Plugging in the values, we have:
YTM = ($1,000 / $393.78)^(1/32) - 1

Using a financial calculator or spreadsheet software, the YTM comes out to approximately 2.5%.