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problem: Assume you buy a five-year zero-coupon Treasury bond for $800 per $1000 face value. Suppose annual compounding throughout the problem. Answer the problems:

[A]   Determine the yield to maturity on the bond?

[B]   Assume the yield to maturity on comparable zeros increases to 7 percent immediately after pur­chasing the bond and remains there. Compute your annual return [holding period yield] if you sell the bond after one year.

[C]     Assume yields to maturity on comparable bonds remain at 7 percent, find out your annual return if you sell the bond after two years.

[D]    Suppose after three years, the yield to maturity on similar zeros declines to 3 percent. Compute the annual return if you sell the bond at that time.

[E]    If the yield to maturity remains at 3 percent, compute your 4 year annual return [you sell the bond after four years].

[F]      Compute your 5 year annual return.

[G]    What relationship do you observe between annual returns find outd in [lb] through [If] and the yield to maturity in [la]?

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