Question

Suppose you bought a five-year zero-coupon Treasury bond for $800 per $1000 face value. What is the yield to maturity (annual compounding) on the bond?

Answer 1

To calculate the yield to maturity (YTM) on a zero-coupon Treasury bond, we can use the formula:

YTM = (Face Value / Purchase Price)^(1 / Years to Maturity) - 1

In this case, the face value of the bond is $1000, and the purchase price is $800. The bond has a maturity period of five years.

Plugging in the values into the formula:

YTM = ($1000 / $800)^(1 / 5) - 1

YTM = (1.25)^(0.2) - 1

YTM ≈ 0.0471 or 4.71%

Therefore, the yield to maturity (annual compounding) on the bond is approximately 4.71%.