Question

Suppose the U.S. Treasury offers to sell you a bond for $747.25. 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

Interest rate to be earned = 6.8%

Step-by-step explanation:

Step 1

Calculate the return over the holding period

(1000-747.25)/747.25

=0.338240214

Step 2

Convert the holding period return to annual return.

Divided by number 5 years and convert to %

(0.338240214/ 5)× 100

= 6.8%

Note that holding period is 5 years

interest rate to be earned = 6.8%