Suppose you purchase a 30-year, zero-coupon Treasury bond with a yield to maturity of 6%. You hold the bond for five years before selling it.
If the bond’s yield to maturity is 6% when you sell it, what is the internal rate of return of your investment?
If the bond’s yield to maturity is 7% when you sell it, what is the internal rate of return of your investment?
Even if the bond has no chance of default, is your investment risk free? Explain. If not, what would make the investment risk-free from the investor’s perspective?