$25,000 zero-coupon bond has nine years to go until it matures. You buy it for $10,600. At what interest rate will you be earning, if you hold the bond to maturit

Question

$25,000 zero-coupon bond has nine years to go until it matures. You buy it for $10,600. At what interest rate will you be earning, if you hold the bond to maturit

Answer 1

With a financial calculator, this is easy.

Future value; 25000

Present value: 10600

Periods: 9

Compute I/Y: 10%

On a securities licensing exam it probably wouldn't be asked or they'd give you a broad range of answers so you'd have a good chance at estimating. Estimate by using the Rule of 72, you are doubling 2.36 times in 9 years so you know the rate is over 8% by roughly a third. If they gave you some numbers you could play with them and get the correct answer.