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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 worthofbondspayableinoneyear. Thepriceitgetstodayis100 worth of bonds payable in one year. The price it gets today is 98. What is the implicit interest rate?

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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 100andthepurchasepriceis100 and the purchase price is 98. Plugging these values into the formula, we get:

Implicit Interest Rate = (100100 - 98) / $98 * 100

Simplifying the equation, we have:

Implicit Interest Rate = 2/2 / 98 * 100

Calculating further, we find:

Implicit Interest Rate ≈ 2.04%

Therefore, the implicit interest rate for the bond is approximately 2.04%.

This problem has been solved

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