Question: suppose a zero-coupon bonds pays $1000 in 10 years. assuming annual compounding.

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Question:

suppose a zero-coupon bonds pays $1000 in 10 years. assuming annual compounding. what is the rate of return is the bond costs $301.00 today?

Answer:

Suppose rate of return on bond = r

$1,000 = $301 × (1 + r) ^ 10

(1 + r) ^ 10 = $1,000 / $301

(1 + r) ^ 10 = 3.3222

(1 + r) = 3.3222 ^ (1 / 10)

(1 + r) = 1.1276

r = 1.1276 – 1

= 12.76%

Rate of return on zero coupon bond is 12.76%.

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