The central bank is selling $100 worth of bonds payable in one year. The price it gets today is $98. What is the implicit interest rate?
Question
The central bank is selling $100 worth of bonds payable in one year.
The price it gets today is $98.
What is the implicit interest rate?
Solution
To calculate the implicit interest rate, we need to use the formula:
Implicit Interest Rate = (Face Value - Purchase Price) / Purchase Price * 100
In this case, the face value of the bond is 98. Plugging these values into the formula, we get:
Implicit Interest Rate = (98) / $98 * 100
Simplifying the equation, we have:
Implicit Interest Rate = 98 * 100
Calculating further, we find:
Implicit Interest Rate ≈ 2.04%
Therefore, the implicit interest rate for the bond is approximately 2.04%.
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