Question

how much would you have to pay for a 6 year bond earning 4.5% simple intere

Example 2: How much would you have to pay for a 6-year bond earning 4.5% simple interest whose future value is $1000? Example 3: A 5-year bond costs $1000 and will pay a total of $250 simple interest over its lifetime. What is its annual interest rate?

Answer 1

Example 2:

Future value = Principal + (Principal x Simple interest rate) x No. of years

$1,000 = P + (P x 4.5%) x 6 years

$1,000 = P + 0.27P

$1,000 = 1.27P

P = $1,000/1.27

P =$787.40

Thus, i would have to pay $787.40 for a 6 year bond earning 4.5% simple interest whose future value is $1,000

Example 3:

Annual interest = Total interest ÷ No, of years = $250/5 years = $50

Annual interest rate = (Annual interest ÷ Bond cost) x 100

= ($50 ÷ $1,000) x 100

=0.05 x 100

=5%