A local bank is offering a zero-coupon certificate of deposit for $25,000. At maturity, three years from now, the investor will receive $32,000. What is the rate of return on this investment?
A) 3 percent
B) 6 percent
C) 9 percent
D) 12 percent

Question

Quizplus · Accepted Answer

The rate of return can be calculated using the formula:

Rate of return = [(future value/present value)^(1/n)] - 1

where,
future value = $32,000
present value = $25,000
n = 3 (years)

Plugging in the values, we get:

Rate of return = [(32000/25000)^(1/3)] - 1 
               = 0.0843 or 8.43% (approx.)

Therefore, the closest option is C) 9 percent, which is the best choice.

A Local Bank Is Offering a Zero-Coupon Certificate of Deposit