Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of
5.6 %. You hold the bond for five years before selling it.
a. If the bond's yield to maturity is
5.6 %
when you sell it, what is the annualized rate of return of your investment?
b. If the bond's yield to maturity is
6.6 %
when you sell it, what is the annualized rate of return of your investment?
c. If the bond's yield to maturity is
4.6 %
when you sell it, what is the annualized rate of return of your investment?
d. Even if a bond has no chance of default, is your investment risk free if you plan to sell it before it matures? Explain.