If you hold the bond to maturity, what is your annual rate of return?Assuming that you hold the bond to maturity, is the IRR greater or less than the return on the bond in part (a)?
5. (a) Suppose that you have purchased a 5-year zero-coupon bond with face value of
$1000 and a price of $800. If you hold the bond to maturity, what is your annual
rate of return?
(b) Now suppose you have purchased a 5-year bond with face value of $1000, a 10%
annual coupon, and a price of $900. Assuming that you hold the bond to maturity,
is the
Zero coupon bonds are those bonds that are purely discounted based on rates, which means there is no coupon rate on these bonds, hence their price is lower than of coupon rate.
On the other hand, a coupon bond is a bond that pays coupons which can be quarterly monthly, annually, etc. their price is higher compared to zero coupon bonds because of their coupon premiums.
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