Question

What interest rate is implicit in a $1,000 par value zero-coupon bond that matures in 7 years if the current price is $500. Please specify your answer in decimal terms and round your answer to the nearest thousandth (e.g., enter 12.3 percent as 0.123).

Answer 1

0.104

Step-by-step explanation:

We are to determine the yield to maturity of the bond

yield to maturity can be determined using a financial calculator

Cash flow in year 0 = -500

Cash flow each year from year 1 to 6 = 0

Cash flow in year 7 = 1000

YTM = 10.4%

To find the YTM using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.