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A zero coupon bond pays no interest-only it face value of $1,000 at maturity. One such bond has a maturity of 18 years and an initial price of $130. What annual interest rate is earned if the bond is bought
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A zero coupon bond pays no interest-only it face value of $1,000 at maturity. One such bond has a maturity of 18 years and an initial price of $130. What annual interest rate is earned if the bond is bought when issued and held to maturity?

User Fegemo
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1 Answer

1 vote

Answer:

12%

Step-by-step explanation:

FV = PV*(1+i)^n

FV = 1000, PV = 130, i = annual interest rate, n = 18

∴ 1000 = 130*(1+i)^18

==> (1+i)^18 = 1000/130

==> 1+i = (1000/13)^(1/18)

i = 1.12001895 - 1

i = 0.12

i = 12%

Thus, the annual interest rate is 12%

User Sejal
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