Question

Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price? 1. 4.37%2. 4.86%3. 5.40%4. 6.00%5. 6.60%

Answer 1

Answer:

r = 6.00%

Explanation:

given data:

bond price = $747.25

$V = \frac{P}{(1+r)^n}$

$747.25 = \frac{1000}{(1+r)^5}$

$(1+r)^5= \frac{1000}{747.25}$

1.33824  =(1+r)^5

taking log on both side

5 ln (1+r)= ln 1.33824

$ln (1+r)= \frac{0.291355477}{5}$

ln (1+r) = .05827

$1+r =e^{0.05827}$

1+r =1.06

r=0.06

r = 6.00%