Problem:
1.
|
Maturity (years)
|
1
|
2
|
3
|
4
|
5
|
|
Price
|
$97.25
|
$94.53
|
$91.83
|
$89.23
|
$87.53
|
The above table shows the price per $100 face value of several risk-free, zero-coupon bonds. What is the yield to maturity of the three-year, zero-coupon, risk-free bond shown?
A. 2.83%
B. 2.85%
C. 2.86%
D. 2.88%
2. Which of the following statements is FALSE?
A. The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default free bond at its current price and hold it to maturity.
B. The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond.
C. Financial professionals also use the term spot interest rates to refer to the default-free zero-coupon yields.
D. When we calculate a bond's yield to maturity by solving the formula, price of an n-period bond =
coupon/ (1+ YTM)1 + Coupon/ (1+ YTM)2 + .....+ Coupon + Face/ (1+ YTM)n, the yield we compute will be a rate per coupon interval.
Summary
These short questions belong to Finance. The 1st question is about the yield to maturity for zero-coupon, risk-free bonds. The 2nd question is about finding a false statement.