Posted by C.J. on .
A zero-coupon bond matures for $1,000 in exactly 12 years' time. If you paid $385.63 today for the bond, what average yearly rate of return will you earn?
I don't think I am right, but $83.33 or 32.13 I am b=not sure
Let r=interest rate
(1+r)12 = 1000/385.63 = 2.5932
Solve for 1+r and calculate r as the interest rate.
Rule of 72 says that money invested at r% will double in 72/r years (approximately).
Since the investment has more than doubled in 12 years, the interest rate should be more than 72/12=6%.
In fact, it is over 8%.
Post your results if you want to check.