Question

Suppose the U.S. Treasury offers to sell you a 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 $4,100. What interest rate would you earn if you bought this bond at the offer price

Answer 1

Answer: the interest rate is 3.67%

Step-by-step explanation:

We would apply the formula for determining simple interest which is expressed as

I = PRT/100

Where

I represents interest paid on the bond.

P represents the principal or amount at which you bought the bond.

R represents interest rate on the bond

T represents the duration of the bond in years.

From the information given,

P = 3000

T = 10 years

I = 4100 - 3000 = 1100

Therefore,

1100 = (3000 × R × 10)/100 = 300R

R = 1100/300

R = 3.67%

Answer 2

Answer:

r = 3.17%

The interest rate is 3.17%

Step-by-step explanation:

Applying the compound interest formula.

A = P(1+r)^t

Where;

A = final value of bond

P = Initial value of bond

t = time of investment

r = yearly interest rate.

Making r the subject of formula;

(1+r)^t = A/P

1+r = (A/P)^(1/t)

r = (A/P)^(1/t) - 1 ............1

Given;

A = $4100

P = $3000

t = 10 years

Substituting the values, we have;

r = (4100/3000)^(1/10) - 1

r = 1.0317 - 1

r = 0.0317

r = 3.17%

The interest rate is 3.17%