Question

You have purchased a u.s. treasury bond for rs.3,000. no payments will be made until the bond matures 10 years from now, at which time it will be redeemed for rs.5,000. what interest rate will you earn on this bond?

a. 3.82%
b. 4.72%
c. 5.24%
d. 4.25%

Answer 1

To calculate the interest rate earned on a U.S. Treasury bond, the formula for compound interest is used. The correct annual interest rate given the principal amount of Rs.3,000 and a maturity amount of Rs.5,000 after 10 years is approximately 5.24%, which is option c.

Step-by-step explanation:

The question asks to calculate the interest rate earned on a U.S. Treasury bond purchased at Rs.3,000, which will be redeemed for Rs.5,000 after 10 years. To find the annual interest rate, we use the formula for compound interest, which is P(1 + r)^n = A, where P is the principal amount (Rs.3,000), A is the amount on maturity (Rs.5,000), n is the number of years (10), and r is the annual interest rate.

Solving for r, we get:

• 3000(1 + r)^10 = 5000
• (1 + r)^10 = 5000 / 3000
• (1 + r)^10 = 5/3
• 1 + r = (5/3)^(1/10)
• r = (5/3)^(1/10) - 1

Calculating the value of r yields an interest rate of approximately 5.24%, which corresponds to option c.