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March 26, 2017

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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?

  • Math/Economics - ,

    I don't think I am right, but $83.33 or 32.13 I am b=not sure

  • Math/Economics - ,

    Let r=interest rate
    385.63*(1+r)12=1000
    (1+r)12 = 1000/385.63 = 2.5932
    Solve for 1+r and calculate r as the interest rate.

    Quick check:
    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.

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