An FI Manager Purchases a Zero-Coupon Bond That Has Two

question 33

Multiple Choice

An FI manager purchases a zero-coupon bond that has two years to maturity.The manager paid $826.45 per $1,000 for the bond.The current yield on a one-year bond of equal risk is 9 percent,and the one-year rate in one year is expected to be either 11.60 percent or 10.40 percent.Either rate is equally probable.

What is the yield to maturity for the two-year bond if held to maturity?

• A)11.00 percent.
• B)10.00 percent.
• C)13.54 percent.
• D)11.60 percent.

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Definitions:

Market Value

The current price at which an asset or service can be bought or sold in a market.

Bond Prices

The amount of money that buyers are willing to pay for bonds, which inversely correlates with the direction of interest rates.

Par Value

A nominal value assigned to a security or stock as stated in the corporate charter, which bears no relation to market value.

Market Return

The total return on an investment, including dividends and capital gains, as measured over a specified period in the overall market.