A zero-coupon bond has no coupons, so there is no reinvestment risk. The return comes entirely from the change in bond price due to the yield increase.

Step 1: Initial price

At purchase, the bond had 7.0 years to maturity and yielded 3.0% with semi-annual compounding:

$$P_0 = \frac{100}{(1+0.03/2)^{14}}$$

Step 2: Current price

Six months later, the bond has 6.5 years remaining, and the yield has risen to 3.4% with semi-annual compounding:

$$P_1 = \frac{100}{(1+0.034/2)^{13}}$$

Step 3: Holding-period return over 6 months

$$HPR = \frac{P_1}{P_0} - 1 \approx -1.06\%$$

Step 4: Convert to a per-annum return with semi-annual compounding

For a 6-month holding period, the quoted annual return with semi-annual compounding is approximately:

$$2 \times (-1.06\%) \approx -2.13\%$$

Conclusion

• Per annum return: -2.13%
• Reinvestment risk: None, since the bond is zero-coupon