If you purchase a bond for \$1,000 that pays annual interest of \$50 and will be redeemed at par (\$1,000) after one year, what is the rate of return you would earn?

• A. 1%
• B. 0.5%
• C. 10%
• D. 5%

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the components of the bond investment. The bond is purchased for \$1,000 (initial investment), pays annual interest of \$50 (income), and will be redeemed at par (\$1,000) after one year (final value).
2. Step 2: Recall the formula for calculating the rate of return: \( \text{Rate of Return} = \frac{\text{Income}}{\text{Initial Investment}} \times 100 \).
3. Step 3: Substitute the values into the formula. The income is \$50 (annual interest), and the initial investment is \$1,000.
4. Step 4: Perform the division \( \frac{50}{1000} \) to determine the proportion of the return relative to the initial investment.
5. Step 5: Multiply the result by 100 to express the rate of return as a percentage.