A firm issues zero-coupon bonds with a face value of $1,000 and time to maturity of 26 months. The bonds are currently trading at $751.4. What is the annual yield on this bond? Answer in percent, rounded to one decimal place (5.428% --> 5.4).

A firm issues zero-coupon bonds with a face value of $1,000 and time to maturity of 26 months. The bonds are currently trading at $751.4. What is the annual yield on this bond? Answer in percent, rounded to one decimal place (5.428% --> 5.4).

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter20: Hybrid Financing: Preferred Stock, Warrants, And Convertibles

Section: Chapter Questions

Problem 1P: Neubert Enterprises recently issued $1,000 par value 15-year bonds with a 5% coupon paid annually...

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Question

A firm issues zero-coupon bonds with a face value of $1,000 and time to maturity of 26 months. The bonds are currently trading at $751.4. What
is the annual yield on this bond? Answer in percent, rounded to one decimal place (5.428% --> 5.4).

Expert Solution

Step 1

To calculate zero coupon yield:

$Z e r o c o u p o n b o n d y i e l d = {(\frac{F A C E V A L U E}{P R E S E N T V A L U E})}^{\frac{1}{n}} - 1 n = n u m b e r o f p e r i o d s$

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