Suppose you bought a five-year zero-coupon Treasury bond with $ 1000 face value for $800. .
Answer the following questions:
(a) What is the yield to maturity on the bond?
(b) Assume the yield to maturity on comparable bonds increases to 7% after you purchase the bond and remains there. Calculate your holding period return if you sell the bond after one year.
(c) Assuming yields to maturity on comparable bonds remain at 7%, calculate your holding period return if you sell the bond after two years.
(d) Suppose after 3 years, the yield to maturity on comparable bonds declines to 3%. Calculate the holding period return if you sell the bond at that time.
(e) If the yield remains at 3%, calculate your holding period after four years. (f) After five years. (g) What explains the relationship between holding period returns calculated in (b) through (f) and the yield to maturity in (a)?