Question

Zero-coupon bonds: a. A ten-year, zero coupon bond trades at a Yield-to-Maturity (YTM) of 3.5%. Assume you buy $1000 worth of the bond today. How much will it be worth 10 years from now at maturity? b. A 5-year, zero coupon bond trades at a Yield-to-Maturity (YTM) of 2.5%. Assume you buy $1000 worth of the bond today. How much will it be worth 5 years from now at maturity? C. Assume you invest $1,131.41 today and receive $1,410.60 five years from now. What rate of return (CAGR) did you receive?

Answer 1

a). Given, YTM of a 10 year zero coupon bond = 3.5%

PV = $1000

So, FV = PV*(1+YTM)^t = 1000*1.035^10 = $1410.60

b). Given, YTM of a 5 year zero coupon bond = 2.5%

PV = $1000

So, FV = PV*(1+YTM)^t = 1000*1.025^10 = $1131.41

c). Given, PV = $1131.41

FV after 5 years = 1410.60

So, 1410.60 = 1131.41 * (1+r)^5

r = 4.51%

Rate of return received = 4.51%