You consider buying a Treasury zero (a special type of zero coupon bond backed by Treasury...

You consider buying a Treasury zero (a special type of zero coupon bond backed by Treasury bonds) with a face value at maturity of $10,000. The bond matures in 8 years. Suppose that other investors currently are willing to pay $5,678 for this bond.

Given this information, we can deduce the annual discount rate (assuming annual compounding) that these investors are applying to value the Treasury zero. What is this rate?

Express your answer in percent to three decimal places. (For example, enter 3.175 for “3.175%”.)

Solutions

Expert Solution

In short, the question demand the bond's Yield to maturity

Using a financial calculator

FV = 10000

PV = 5678

N = 8

PMT = 0

CPT I/Y, we get I/Y = 7.331

Hence, the annual discount rate = 7.331%

jeff jeffy answered 2 years ago

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