Nathan bought a zero coupon bond in 2010 for $485.19. In 2020 he redeemed it for $1,000. His internal rate of return on this investment was

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) can be calculated using the formula for the compound annual growth rate (CAGR), since a zero coupon bond pays no interest and its return is realized at redemption. The formula is: $$ \text{CAGR} = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{\text{n}}} - 1 $$ where n is the number of years. Plugging in the values: $$ \text{CAGR} = \left( \frac{1000}{485.19} \right)^{\frac{1}{10}} - 1 \approx 0.075 $$ or 7.5%.

Nathan Bought a Zero Coupon Bond in 2010 for $485