g one of your friends purchased a zero coupon corporate bond (i. e., a bond that has no interest payments) for $4,850. The bond has a face value of $25,000 and is due in 16 years. If the bond is held to maturity, what rate of return will your friend make on the investment?

The rate of return on the investment is 10.79% per year

Explanation:

The rate of return on the bond can be calculated using the future value formula, which is given as:

FV=PV * (1+r) ^N

FV future value is the value of investment at redemption at $25000

PV is the current price of the bond now at $4,850

r is the rate of return on the bond which is unknown

N is th number of years the bond matures which is 16 years

25000=4,850 * (1+r) ^16

divide both sides by 4850

(25000/4850) = (1+r) ^16

divide the exponential on both sides by 16

(25000/4850) ^1/16=1+r

1.107930178 = 1+r

r=1.107930178 - 1

r=0.10793

r=10.79%