Sam purchased a 30-year, zero-coupon bond with a yield to maturity (YTM) of 4%. After holding it for 5 years, he sold it. (Note: Assume annual compounding.)

a. Assume the bond's YTM is 4% when he sells it, what is the IRR of his investment? %

b. Assume the bond's YTM is 5% when he sells it, what is the IRR of his investment? %

c.Even if a bond has no chance of default, is your investment risk free if you plan to sell it before it matures? Explain.(Select the best choice below.)

A.

If there is no chance of default, the investment is risk free no matter when you sell it.

B.

Even though the yield to maturity changes, if there is no chance of default, then the bond is risk free.

C.

Even without default, if you sell prior to maturity, you are exposed to risk that the YTM may change.

D.

There is always a chance of default , so every bond has risk