Answer: -2.13% with no reinvestment risk

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

Author: Manit Arora