Question

What is the percentage return (interest rate) an investor will receive if they purchase a zero-coupon bond today for $954.70 that will mature in one year and pay $1,000 at maturity?

Answer 1

Answer:

Interest rate = 4.75% (approx)

Explanation:

Given:

Face value of bond = $1,000

Present value of bond = $954.70

Interest rate = ?

Computation of Interest rate :

$Interest rate = [\frac{Face value of bond}{Present value of bond}-1] \times 100$

$Interest rate = [\frac{1,000}{954.70}-1] \times 100\\\\Interest rate = [1.04744946-1] \times 100\\Interest rate = [0.04744946] \times 100\\= 4.744946$

Interest rate = 4.744946%

Interest rate = 4.75% (approx)