Question

Assume a zero-coupon bond that sells for $270 and will mature in 25 years at $1,850. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods

Answer 1

Effective yield to maturity is 8.00%

As, we know.

Data provided in the question:

Selling price of the bond i.e current value = $270

Future value = $1,850

Maturity time, t = 25 years

Now,

Effective yield to maturity, r = ( Future Value ) ¹⁻т -`1

                                                  Current Value                                                

on substituting the respective values, we get

⇒ Effective yield to maturity, r =  ($1.850) 1/25 -1

                                                     $270                                      

⇒ Effective yield to maturity, r = 1.0800 - 1

or

Effective yield to maturity = 0.0800

⇒ 0.0800 × 100% = 8.00%

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