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.

---

Definitions:

Empathetically Listen

The act of listening with empathy, which involves fully understanding and being sensitive to the feelings and thoughts of another person.

Sobbing Uncontrollably

The act of crying with short, quick breaths, typically as a result of acute emotional distress, grief, or pain.

Nature Vs. Nurture

The debate concerning the relative importance of an individual's innate qualities (nature) versus personal experiences (nurture) in determining or causing individual differences in physical and behavioral traits.

Negative

A term indicating the absence of a property or condition, often used in contrast to its presence.