An engineer planning for his child’s college education purchased a zero-coupon corporate bond (i.e., a bond that has no dividend payments) for $9250. The bond has a face value of $50,000 and is due in 18 years. If the bond is held to maturity, determine the i* for the investment.
What will be an ideal response?
0 = -9250 + 50,000(P/F,i*,18)
(P/F,i*,18) = 0.1850
Solve directly or use spreadsheet
i* = 9.83% per year (spreadsheet)
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