Homework Answers
Calculation of Yield to Maturity of a Zero Cupon Bond
YTM = Yield to Maturity
Price of Bond = Face Value of Bond / (1 + YTM)n
a. Price of Bond = $742.22
Face Value of Bond = $1000
n = 6 years
Therefore
Price of Bond = Face Value of Bond / (1 + YTM)n
$742.22 = $1000 / (1 + YTM)6
YTM = ($1000 / 742.22)1/6 - 1
= 1.0509 - 1
= 0.0509
= 5.09%
b. Yield when price falls to $726
$726 = $1000 / (1 + YTM)6
YTM = ($1000 / 726)1/6 - 1
= 1.0548 - 1
= 0.0548
= 5.48%
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