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?

Question

Business

Jaiden Chen

5 December, 05:22

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?

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Answers (1)

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Gia · Answer 1

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%