| When the U.S. Treasury offers to sell you a bond for $613.81. No payments will be made until the bond mature,?

When the U.S. Treasury offers to sell you a bond for $613.81. No payments will be made until the bond mature,?

Charlotte D asked:


What if the U.S. Treasury offers to sell you a bond for $613.81. No payments will be made until the bond matures 10 years from now , at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

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Comments

3 Responses to “When the U.S. Treasury offers to sell you a bond for $613.81. No payments will be made until the bond mature,?”

  1. jeff410 on March 16th, 2009 9:11 am

    3.86 percent annually

  2. ronwizfr on March 17th, 2009 4:51 pm

    ($1,000/$613.81)^(1/10) = 1.0500 => 5.00%

  3. squadfix on March 19th, 2009 2:27 am

    The answer is 5%. Solved as follows:

    $1,000 * 1/((1+r)^10) = $613.81, doing the algebra gives you 5%.

    to check this.

    do $613.81 * (1 + 5%)^10, which equals 613.81 * 1.629 = $999.8….close enough.