Question

You have purchased a U.S. Treasury bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate will you earn on this bond

Answer 1

.05241 or 5.241%

Step-by-step explanation:

The computation of the interest rate earned on the bond is shown below;

As we know that

Interest rate = (Redemption price ÷ offer price)^1 ÷ number of years - 1

= ($5,000 ÷ $3,000) ^1 ÷ 10 - 1

= (1.67)^1 ÷ 10 - 1

= (1.67)^.1 - 1

= 1.05241 - 1

= .05241 or 5.241%

We simply applied the above formula so that we can easily determine the

interest rate earned on the bond