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:

Straight-Line Method

A depreciation method that allocates an equal amount of depreciation each year over the useful life of the asset.

Defined Benefit Pension Plan

A type of pension plan where an employer commits to pay a specified pension amount to the retiree, based on factors like salary history and duration of employment.

Pension Expense

The company's cost in a specific period for providing pension benefits to employees during that period.

Funding Agency

An organization that provides financial support for various projects or enterprises.