Suppose that a 1-year zero-coupon bond with face value $100 currently sells at $89.75, while a 2-year zero sells at $79.88. You are considering the purchase of a 2-year-maturity bond making annual coupon payments. The face value of the bond is $100, and the coupon rate is 10% per year. a. What is the yield to maturity of the 2-year zero?

11.89%

Explanation:

You can use a financial calculator to find the yield to maturity of the 2 year - zero coupon bond. Input the following;

Time to maturity; N = 2

Face value of the bond; FV = 100

Annual coupon payments; PMT = 0 (since it's a zero-coupon bond)

Present value or price of the bond; PV = - 79.88

Next, compute the annual interest rate; CPT I/Y = 11.89%

Therefore, the yield to maturity of the 2-year zero-coupon bond is 11.89%