A local brokerage firm is offering a zero-coupon certificate of deposit for $10,000. At maturity, three years from now, the investor will receive $14,000. What is the rate of return on this investment?
A) 14 percent
B) 13 percent
C) 12 percent
D) 11 percent

Question

Quizplus · Accepted Answer

The rate of return can be calculated using the formula for compound interest: $A = P(1 + r)^n$, where $A$ is the amount at maturity ($14,000), $P$ is the principal amount ($10,000), $r$ is the annual rate of return, and $n$ is the number of years (3). Rearranging the formula to solve for $r$, we get $r = \left(\frac{A}{P}\right)^{\frac{1}{n}} - 1$. Substituting the given values, we get $r = \left(\frac{14000}{10000}\right)^{\frac{1}{3}} - 1 = 1.25992 - 1 = 0.12$, or 12 percent.

A Local Brokerage Firm Is Offering a Zero-Coupon Certificate of Deposit