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10-13I

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Essentials Of Investments
Found in: Page 329
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

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Short Answer

The stated yield to maturity and realized compound yield to maturity of a (default-free) zero-coupon bond will always be equal. Why?

A zero-coupon bond has the same values for YTM and realized compound yield because there is no reinvestment rate uncertainty.

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Step by Step Solution

Definition

The bonds which do not pay interests but trade at a deep discount from their face value is known as zero coupon bond.

Explanation on compound yield to maturity on zero coupon bond

Zero coupon bonds provide no coupons for reinvestment. Therefore the final value of the coupon comes from the principal of the bond and is independent of the rate at which this could be reinvested. There is no reinvestment rate uncertainty with zeros.

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