Suppose you purchase a30-year, zero-coupon bond with a yield to maturity of 7%. You hold the bond for five years before selling it.

a. If thebond's yield to maturity is 7% when you sellit, what is the internal rate of return of yourinvestment?

b. If thebond's yield to maturity is 8% when you sellit, what is the internal rate of return of yourinvestment?

c. If thebond's yield to maturity is 6% when you sellit, what is the internal rate of return of yourinvestment?

d. Even if a bond has no chance ofdefault, is your investment risk free if you plan to sell it before itmatures? Explain.

Note: Assume annual compounding.

a. If thebond's yield to maturity is 7% when you sellit, what is the internal rate of return of yourinvestment?

The IRR of your investment if thebond's yield to maturity is 7% when you sell it is

nothing

%. (Round to two decimalplaces.)

b. If thebond's yield to maturity is 8% when you sellit, what is the internal rate of return of yourinvestment?

The IRR of your investment if thebond's yield to maturity is 8% when you sell it is

nothing

%. (Round to two decimalplaces.)

c. If thebond's yield to maturity is 6% when you sellit, what is the internal rate of return of yourinvestment?

The IRR of your investment if thebond's yield to maturity is 6% when you sell it is

nothing

%. (Round to two decimalplaces.)

d.Even if a bond has no chance ofdefault, is your investment risk free if you plan to sell it before itmatures? Explain.(Select the best choicebelow.)

A.

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

B.

Even though the yield to maturitychanges, if there is no chance ofdefault, then the bond is risk free.

C.

Even withoutdefault, if you sell prior tomaturity, you are exposed to risk that the YTM may change.

D.

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