Anonymous
Anonymous asked in Business & FinanceInvesting · 8 years ago

zero coupon bonds question?

A $1000 zero coupon bond sells for $519 and matures after 5 years. What is the current yield and the yield to maturity?

What are the holding period and annualized compounded returns if you buy a zero coupon bond for $519 and it is redeemed after 5 years for $1000? Compare to previous answer

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  • 8 years ago
    Favorite Answer

    Zero coupon bond value = F / (1 + r)t

    Where:

    F = face value of bond

    r = rate or yield

    t = time to maturity

    The answers to your problem is:

    Current yield: 0% (there are no coupon payments at all. Face amount is returned at maturity)

    YTM: 14%

    Here are some explanatory examples and a bond yield calculator. However, you need to do it on a trial and error basis, as it is set-up only to compute the current price:

    http://www.investinganswers.com/financial-dictiona...

    http://www.stockresearchpro.com/investing-in-zero-...

  • Jerry
    Lv 7
    8 years ago

    Find the total return. Then take the 5th root to annualize over 5 years.

    (1000 / 519 )^(1/5) = 1.1401 or 14.01%

    Second part wording is weird, so not clear what it is trying to get at. Cash flows are identical. -519 now and +1000 in 5 years. No economic difference.

  • 8 years ago

    The current yield is zero because there are no interest payments. The yield to maturity is 14.018%, which I calculated using the yield to maturity calculator cited below.

    The second part of the question is essentially asking the same thing, so there is no real difference.

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