Question

Consider a zero-coupon bond with 20 years to maturity. The price at which this bond will trade if the YTM is 6% is closest to: A. $335. B. $215. C. $306. D. $312.

Answer 1

The price of the zero-coupon bond with a 20-year maturity and a YTM of 6% is $312.

Step-by-step explanation:

A zero-coupon bond is a bond that does not pay interest periodically but is sold at a discount to its face value.

To calculate the price of the bond when the yield to maturity (YTM) is 6%, we can use the present value formula: Price = Face Value / (1 + YTM)^n, where n is the number of years to maturity.

In this case, the bond has a face value of $1,000 and 20 years to maturity. Plugging in the values, we get:

Price = $1,000 / (1 + 0.06)^20 = $312.49

Therefore, the closest price at which this bond will trade when the YTM is 6% is D. $312.

Answer 2

When the interest rate is less than the market interest rate, the price of a bond will typically be lower than its face value. For a zero-coupon bond with a 20-year maturity and a YTM of 6%, the price would be closest to $335.

Step-by-step explanation:

When the interest rate is less than the market interest rate, the price of a bond will typically be lower than its face value. In this case, the bond has a 20-year maturity and a yield to maturity (YTM) of 6%. To find the price of the bond, we need to calculate the present value of its future cash flows. Since the bond is a zero-coupon bond, it will only pay the principal amount at maturity. Using the present value formula, we can calculate that the bond's price is closest to $335.