Why is the yield to maturity of a

zerominus

coupon,

riskminus

free

bond that matures at the end of a given period the

riskminus

free

interest rate for that period?

A.

Since a bond's price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the

riskminus

free

interest rate will reflect this convergence.

B.

Since interest rates will rise and fall in response to the movement in bond prices.

C.

Since such a bond provides a

riskminus

free

return over that period, the Law of One Price guarantees that the

riskminus

free

interest rate equals the yield to maturity.

D.

Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period.