Question

What interest rate is implicit in a $1,000 par value zero-coupon bond that matures in 6 years if the current price is $470

Answer 1

To find the implicit interest rate, we can use the following formula:

PV = FV / (1 + r)^n

Where PV is the present value (current price), FV is the future value (par value), r is the interest rate, and n is the number of years.

Plugging in the given values, we get:

$470 = $1,000 / (1 + r)^6

Solving for r, we get:

(1 + r)^6 = $1,000 / $470

(1 + r)^6 = 2.1277

1 + r = (2.1277)^(1/6)

1 + r = 1.1021

r = 0.1021 or 10.21%

Therefore, the implicit interest rate is approximately 10.21%.