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. What is the effective yield to maturity? (Assume annual compounding. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Answer:

8.00%

Explanation:

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 = $(\frac{\text{Future value}}{\text{Current value}})^{\frac{1}{t}}-1$

on substituting the respective values, we get

Effective yield to maturity, r = $(\frac{\ 1,850}{\ 270})^{\frac{1}{25}}-1$

or

Effective yield to maturity, r = 1.0800 - 1

or

Effective yield to maturity = 0.0800

or

= 0.0800 × 100% = 8.00%