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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?

  • finance -

    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.

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