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
- cactusgeneLv 78 years agoFavorite Answer
Zero coupon bond value = F / (1 + r)t
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)
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:
- JerryLv 78 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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