Description
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%.
firtukloimutrzas –
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