finance
posted by Teresa on .
If you purchased a zero coupon bond today for $225 and it maturity value is $1,000 in 11 years, what rate of return will you earn on that bond?

P = M/(1 + r)^n
P = price
M = maturity value
r = investor's required annual yield/2
n = number of years to maturity x 2
225 = 1000/(1 + r/2)^22
225(1 + r/2)^22 = 1000
(1 + r/2)^22 = 4.4444
take the 22nd root of each side
1 + r/2 = 1.07015
r/2 = 0.07015
r = .1403
r = 14%
check my math
Online calculators come up with a cost of 236.62 versus 225.00
Close enough because of rounding.