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Exercise

Comparing zero coupon bond yields

Since changing the price of a bond affects the yield and the yield represents the return on investment, comparing different prices allows you to calculate the return you can make from different bonds of different prices.

In this exercise, you will compare the same zero coupon bond at different prices to see how it affects its yield. You will work directly with the formula calculated earlier.

Take a 5 year zero coupon bond with a face value of 100, and compare its yield when it has a price of USD 84.67 and USD 98.33.

Recall the formula for zero coupon bond yield is \(PV = \frac{FV}{(1 + r)^n}\).

Instructions 1/2

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  • 1
    • Find the yield of a 5 year zero coupon bond with a face value of USD 100 and price of USD 84.67.
  • 2
    • Find the yield of a 5 year zero coupon bond with a face value of USD 100 and price of USD 78.22.