Tara purchases a 20-year, 5 percent savings bond with a face value of $10,000 at a premium price of $11,000. She gets the dividend paid yearly. Determine the rate of return on the bond if the bond is kept till maturity.
A) 3.79%
B) 4.62%
C) 5.33%
D) 2.38%

Question

Quizplus · Accepted Answer

The rate of return is calculated by considering both the annual interest payments and the loss incurred by purchasing the bond at a premium. The bond pays $500 annually (5% of $10,000), and over 20 years, this totals $10,000. However, Tara paid $11,000, so she effectively loses $1,000 over 20 years. The net gain is $9,000 ($10,000 - $1,000), and the rate of return is $9,000 divided by the initial investment of $11,000 over 20 years, which is approximately 3.79%.

Tara Purchases a 20-Year, 5 Percent Savings Bond with a Face