Question

A 10-year (zero-coupon) Treasury bill with face value of $100 per share is selling at $70.89 per share. There is a 10-year corporate bond with a 5% coupon rate and face value of $100 per share. The coupon payment is every 12 months. The price of the bond is $96.23 per share. The 10-year, zero coupon Treasury bills are selling at $70.89. What is the bond's yield to maturity?

Answer 1

3.5%

Step-by-step explanation:

the yield to maturity of a zero coupon bond is calculated using the following formula:

YTM = (face value / current market value)¹/ⁿ - 1

YTM = ($100 / $70.89) ¹/¹⁰ - 1 = 3.5%

the way you can check if your calculations were correct is to find the future value of the bond using the YTM = $70.89 x (1 + 3.5)¹⁰ = $99.997 ≈ $100