Question

What is the yield to maturity of a 9 year zero-coupon bond with a par value of $1,000 and a market price of 643? (note: provide answer in percentage points)

Answer 1

Yield to maturity of a Zero coupon bond = R

Price = $1,000 * (1 / (1+ R)⁹]

$643 = $1,000 * (1 / (1+ R)⁹]

0.643 = (1 / (1+ R)⁹]

(1+ R)⁹ = 1 / 0.643

(1+ R)⁹ = 1.555

Apply log on both sides

Log (1+ R)⁹ = Log 1.555

9 * Log (1+ R)⁹ = 0.1917304

Log (1+ R) = 0.021303377

Apply 'Anti log' on both sides

Anti log [Log (1+ R)] = Anti log (0.021303377)

1 + R = 1.0502758

R = 0.0502758

R = 5.0276%