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]?