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

question 80

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.

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Definitions:

Allowance Method

An accounting technique used to estimate and record uncollectible accounts receivable, reducing the net value of accounts receivable to an amount expected to be collected.

Credit Sales

Sales in which revenue is recognized at the point of sale but payment is deferred till a later date, typically employed in business-to-business transactions.

Uncollectible Accounts

Receivables that are deemed to be uncollectable from debtors, leading to their recognition as a loss.

Credit Policy

Guidelines that define the credit limits and terms extended by a business to its customers.