Suppose you buy a five-year zero-coupon Treasury bond for $800 per $1000 face
value. Answer the following questions:
(a) What is the yield to maturity (annual compounding) on the bond?
(b) Assume the yield to maturity on comparable zeros increases to 7% immediately after purchasing the bond and remains there Calculate 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% calculate your annual return if you sell the bond after 2 years
(d) Suppose after 3 years the yield to maturity on similar zeros declines to 3%.
Calculate the annual return if you sell the bond at that time.
(e) If yield remains at 3% calculate your annual return if you sell the bond after
(f) after 5 years
(g) What explains the relationship between annual returns calculated in (b) through (f) and the yield to maturity in (a)?