Question

You are considering investing in a zero-coupon bond that sells for $250. At maturity in 16 years it will be redeemed for $1,000. What approximate annual rate of growth does this represent?

Answer 1

Therefore the annual rate of growth 9%.

Step-by-step explanation:

To find the annual rate, we use the following formula,

`Fv=Pv(1+i)^n`

Fv= future value

Pv= present value.

i= rate of interest

n= time.

Here Pv=$250, Fv= $1,000, n= 16 years

`\therefore1,000=250(1+i)^(16)`

`\Rightarrow (1+i)^(16)=(1000)/(250)`

`\Rightarrow i=4^{\frac1{16}}-1`

`\Rightarrow i=0.09` (approx)

`\Rightarrow i=9\%`

Therefore the annual rate of growth 9%.