Question

Suppose the U.S Treasury offers to sell you a bond for $547.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

Answer 1

To find the interest rate, we use the present value formula and solve for the rate. The interest rate is approximately 6.17%.

Step-by-step explanation:

To calculate the interest rate you would earn if you bought this bond at the offer price, you need to find the present value of the bond's future payments. The bond will be redeemed for $1,000 in 5 years. To find the present value, we can use the formula:

Present Value = Future Value / (1 + Interest Rate)^n

If we plug in the values, we get:

$547.25 = $1,000 / (1 + Interest Rate)^5

We can rearrange the equation and solve for the interest rate:

(1 + Interest Rate)^5 = $1,000 / $547.25

You can then take the fifth root of both sides to find the interest rate:

Interest Rate = (1 + Interest Rate)^(1/5) - 1

Using a calculator, the interest rate is approximately 6.17%.