Question

You purchased a zero-coupon bond one year ago for $279.83. The market interest rate is now 9 percent. Assume semiannual compounding. If the bond had 15 years to maturity when you originally purchased it, what was your total return for the past year

Answer 1

Answer:

4.20%

Explanation:

The zero-coupon bond now 14 years left before maturity,which means that we need to compute the price with 14 years maturity and interest rate of 9% per year in order to determine the total return on the bond over a year period.

Price of the bond=present value of face value of $1000

9% annually while 4.5% is the semiannual yield

the bond has 28 semiannual periods in 14 years

price of the bond today=$1000/(1+4.5%)^28=$291.57  

return over a year=($291.57-$279.83)/$279.83=4.20%