You purchased a zero coupon bond one year ago for $171.56. The bond has a par...
You purchased a zero coupon bond one year ago for $171.56. The bond has a par value of $1,000 and the market interest rate is now 9 percent. If the bond had 20 years to maturity when you originally purchased it, what was your total return for the past year? Assume semiannual compounding. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Homework Answers
The total return for the past year
The Price of the Zero-Coupon Bond is the Present Value of the Par Value of the Bond
The Current price of the Zero-Coupon Bond
Par Value of the Bond = $1,000
Yield to Maturity (YTM) = 4.50% [9.00% x ½]
Maturity Period = 38 Years [(20 Years – 1 Year) x 2]
Therefore, the Price of Zero-Coupon Bond = Par Value / (1 + YTM)n
= $1,000 / (1 + 0.0450)38
= $1,000 / 25.32622
= $187.75
Therefore, the total return for the past year = [(Current Price – Original Price) / Original Price] x 100
= [($187.75 - $171.56) / $171.56] x 100
= [$16.19 / $171.56] x 100
= 9.44%
“Hence, the total return for the past year will be 9.44%”
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