QUESTION 4 Esmerelda is looking to extend her investments beyond shares particularly as the Stock Market is moving downwards. She is interested in Zero Coupon Bonds but needs to understand the different types of interest rate related instruments and asks for your advice on the yields and prices. If a zero-coupon bond with face value $1,000 and maturity of five years sells for $746.22.

a. What is its yield to maturity? 6 marks

b. What will happen to its yield to maturity if its price falls immediately to $730? 6 marks

c. The stated yield to maturity and realized compound yield to maturity of a (default-free) zero-coupon bond are always equal. In your own words, explain to Esmerelda why this is the case? 4 marks '

d. A bond has a current yield of 4% and a yield to maturity of 5%. Is the bond selling above or below par? 4 marks