Question

Two bonds are available on the market as follows:

Bond 1: Face value $750, y years to maturity at a (simple) interest rate of 5%.


Bond 2: Face value $500, 3 years to maturity at a (simple) interest rate of r.


Given that the total return of Bond 1 is $1,000 calculate y.

Answer 1

The correct answer is 7 years.

Answer 2

Explanation:

The formula for determining simple interest is expressed as

I = PRT/100

Where

P represents the principal or initial amount invested.

R represents the interest rate.

T represents duration of the investment in years

From the information given,

P = $750

R = 5%

T = y years

I = the total return of Bond 1 - principal

I = 1000 - 750 = $250

Therefore,

250 = (750 × 5 × y)/100

250 = 37.5y

y = 250/37.5

y = 6.7 years