A one-year bond with a $10,000 original value offers a single fixed payment of $800 at the end of the year. You buy this bond for $8,000 on the bond market. The interest rate on your investment will be 10 percent.

Question

Quizplus · Accepted Answer

The interest rate on the investment is calculated as the discount rate that equates the present value of the bond's cash flow to its purchase price. Using the formula for the present value of a single cash flow, we get:

PV = CF / (1 + r)^n

Where PV is the present value, CF is the cash flow, r is the interest rate, and n is the number of periods. Plugging in the given values, we get:

800 / (1 + 0.1)^1 = 727.27

So the present value of the bond's cash flow is $727.27. Since you bought the bond for $8,000, your rate of return (interest rate) is:

r = (CF - Price) / Price = (800 - 8,000) / 8,000 = -0.9

This means you lost money on the investment, but the interest rate is still 10%.

A One-Year Bond with a $10,000 Original Value Offers a Single