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

question 88

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 that the risk-free interest rate equals the yield to maturity.
• 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.

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