Question

Please show steps and formulas on how you solved the equation. Thanks

25. Assume you can buy a pure discount bond today at a price of $735. The bond matures in 5 years.

What would be the percentage of capital gain over the life of the bond?

Make sure your answer is rounded as a percentage

Answer 1

25. Assume you can buy a pure discount bond today at a price of $735. The bond matures in 5 years.

What would be the percentage of capital gain over the life of the bond?

FV = PV/(1 + r)^n

(1 + r)^n = FV/PV

(1 + r) = (FV/PV)^(1/n)

1 + r = (FV/PV)^(1/n) - 1

r = (FV/PV)^(1/n) - 1

r = (1,000/735)^(1/5) - 1

r = (1.3605442177)^(1/5) - 1

r = 0.06351233699

r = 6.351233699%

The percentage of capital gain over the life of the bond, r = 6.351233699% per year.

Or a holding period of (1 + 6.351233699%)^5 - 1 = 0.3605442177 = 36.05442177% for 5 years

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