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I'm working the following problem, but getting the wrong answer. Any feedback appreciated.

Suppose you bought a five-year zero-coupon Treasury bond for $800 per $1000 face value. Assume the yield to maturity on comparable bonds increases to 7% after you purchase the bond and remains there. Calculate your holding period return (annual return) if you sell the bond after one year.

First, I calculated the value in 1 year at the time of sale. Since it is a five year bond right now, next year it will be a 4 year bond, and at that point, rates will be 7%. Thus, the price will be $1000/(1.07)^4=762.90. Since it was purchased for $800, the return for the year = 762.9/800 - 1 = -0.046, or -4.6%. Is my analysis correct? Any advice appreciated, thank you very much in advance.

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  • That looks right to me - what answer were you given?
    – D Stanley
    May 14 at 21:11
  • @DStanley It didn't give the correct answer, just counted mine wrong. It's a MOOC on Coursera. It's a bit disappointing since it seems to be marking correct answers wrong. Anyway, thanks for your feedback.
    – Hank
    May 15 at 17:21
  • Don't Treasury bonds pay interest semiannually? If so, you may need to consider compounding in your answer (which you don't seem to be doing).
    – Karl
    May 17 at 21:46

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