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barry1999 barry1999
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Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period?

▸ Since such a bond provides a risk-free return over that period, the Law of One Price guarantees the risk-free interest rate be equal to this yield.

▸ 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 risk-free interest rate will reflect this convergence.

▸ 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.

▸ Since interest rates will rise and fall in response to the movement in bond prices.
Textbook 
Fundamentals of Corporate Finance

Fundamentals of Corporate Finance


Edition: 2nd
Authors:
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jenniferagrethejenniferagrethe
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barry1999 Author
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4 years ago
Helps a lot... Now I'm ready for my quiz
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