Question

A risk-free, zero-coupon bond with a $5000 face value has ten years to maturity. The bond currently trades at $3650. What is the yield to maturity of this bond

Answer 1

Answer:

The Yield to Maturity of the bond is YTM = 3.20%

Explanation:

Mathematically the Yield to Maturity of the bond  YTM is as follows

           $YTM = \frac{C + \frac{F-P}{n} }{\frac{F+P}{2} }$

Where C is the amount of payment to be made = $0

           P is the price i.e the present value =$3650

           F is the face value of the bond=$5000

          n is the year of maturity of the bond = 10 years

            $YTM = \frac{0+\frac{5000-3650}{10} }{\frac{5000+3650}{2} } * \frac{100}{1}$

                      $=3.20$%