Question

The current zero-coupon yield curve for risk-free bonds is as follows: What is the risk-free interest rate for a five-year maturity? The risk-free interest rate for a five-year maturity is \%. (Round to two decimal places.)

Answer 1

The risk-free interest rate for a five-year maturity can be calculated using the present value of the bond formula. By discounting the future cash flows, we can determine the interest rate to be approximately 7.02%.

Step-by-step explanation:

The risk-free interest rate for a five-year maturity can be calculated using the information provided. The bond pays $80 per year and has a face value of $1,000. To calculate the interest rate, we need to find the present value of the bond. By discounting the future cash flows, we can determine the risk-free interest rate.

Using the formula for present value, we can calculate the present value of the bond as follows:

PV = (80/((1 + r)1)) + (80/((1 + r)2)) + (80/((1 + r)3)) + (80/((1 + r)4)) + (1,080/((1 + r)5)) = 1,000

Solving this equation for r, the annual interest rate, we find that the risk-free interest rate for a five-year maturity is approximately 7.02%.