What is the total return for a 20-year zero-coupon bond that is offering a yield to maturity of 8% if the bond is held to maturity?
What will be an ideal response?
For zero-coupon bonds, none of the bond's total dollar return is dependent on the interest-on-interest component, so a zero-coupon bond has zero reinvestment risk if held to maturity. The yield earned on a zero-coupon bond held to maturity is equal to the promised yield to maturity. This is because whenever one can reinvest the coupon payments at the yield to maturity, then the total return will be the same as the yield to maturity. Thus, the total return is 8%.
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