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

Answer:

Therefore the annual rate of growth 9%.

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

$\therefore1,000=250(1+i)^{16}$

$\Rightarrow (1+i)^{16}=\frac{1000}{250}$

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

$\Rightarrow i=0.09$  (approx)

$\Rightarrow i=9\%$

Therefore the annual rate of growth 9%.