Why Is the Yield to Maturity of a Zero-Coupon,risk-Free Bond

question 53

Multiple Choice

Why is the yield to maturity of a zero-coupon,risk-free bond that matures at the end of a given period the risk-free interest rate for that period?

• A)Since such a bond provides a risk-free return over that period,the Law of One Price guarantees the risk-free interest rate be equal to this yield.
• B)Since a bond's price will converge on its face value as the bond approaches the maturity date,the Law of One Price dictates that the risk-free interest rate will reflect this convergence.
• C)Since interest rates will rise and fall in response to the movement in bond prices.
• D)Since there is,by definition,no risk in investing in such bonds,the return from such bonds is the best that can be expected from any investment over the period.
• E)Since it the easiest bond to value and this gives investors an easy benchmark against which they can evaluate other investments.

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Definitions:

Encourage Market

Strategies or policies implemented to stimulate economic activity within a market by promoting the production and consumption of goods and services.

Tax Incidence

The analysis of the effect of a particular tax on the distribution of economic welfare, indicating who ultimately bears the burden of the tax.

Tax Burden

The tax burden refers to the total amount of taxes that individuals, businesses, or other entities must pay, expressed as a percentage of income or GDP.

Tax Burden

The overall impact of taxes on an individual's, corporation's, or economy's financial performance and well-being.