Question

Calculate the yield to maturity of a zero coupon bond with a face value (par value) of $1,000, maturing in 15 years and selling for a price of $525.75.a. 5.62%.b. 4.38%.c. 8.74%.d. 15.26%.e. 16.27%.

Answer 1

YTM = 0.043793 or 4.3793% rounded off to 4.38%

Step-by-step explanation:

The yield to maturity or YTM is the yield or return that an investor can earn on the bond if the bond is purchased today and is held till the bond matures. The formula to calculate the Yield to maturity of a zero coupon bond is as follows,

YTM = [ (( F / PV)^1/n) - 1 ]

Where,

F is the Face value of the bond

PV is the current value of the bond

n is the number of years to maturity

YTM = [ (( 1000 / 525.75)^1/15) - 1 ]

YTM = 0.043793 or 4.3793% rounded off to 4.38%