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6 November, 22:07

Suppose the U. S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price

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  1. 7 November, 01:42
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    Interest rate to be earned = 6.8%

    Explanation:

    Step 1

    Calculate the return over the holding period

    (1000-747.25) / 747.25

    =0.338240214

    Step 2

    Convert the holding period return to annual return.

    Divided by number 5 years and convert to %

    (0.338240214 / 5) * 100

    = 6.8%

    Note that holding period is 5 years

    interest rate to be earned = 6.8%
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