Question

g one of your friends purchased a zero coupon corporate bond (i.e., a bond that has no interest payments) for $4,850. The bond has a face value of $25,000 and is due in 16 years. If the bond is held to maturity, what rate of return will your friend make on the investment?

Answer 1

Answer:

The rate of return on the investment is 10.79% per year

Explanation:

The rate of return on the bond can be calculated using the future value formula, which is given as :

FV=PV*(1+r)^N

FV future value is the value of investment at redemption at $25000

PV is the current price of the bond now at $4,850

r is the rate of return on the bond which is unknown

N  is th number of years the bond matures which is 16 years

25000=4,850*(1+r)^16

divide both sides by 4850

(25000/4850)=(1+r)^16

divide the exponential on both sides by 16

(25000/4850)^1/16=1+r

1.107930178 =1+r

r=1.107930178 -1

r=0.10793

r=10.79%