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If a one-year bond has a face value of $5,000 and is sold for $4,500, what...

If a one-year bond has a face value of $5,000 and is sold for $4,500, what is the interest rate on the bond? Round to one decimal place.

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Answer #1

The calculation of interest rate can be made by considering the given bond as a zero-coupon bond and utilizing the formula that we use for its valuation.

The value of a zero-coupon bond can be calculated as:

In this case,

Value of bond (V) = $4,500

Maturity value or face value of bond (M) = $5,000

Number of periods (n) = 1

Interest rate (r) = ?

Upon input of these values in the above formula we get,

  

  

%

or, = 11.1% (rounded off to 1 decimal place)

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