You purchased a five-year annual payment 6% coupon bond for $1,000 and you planned on holding it to maturity. However right after you bought the bond it was called at $1,043.29 when all interest rates fell to 5% and remained there for the full five years. You reinvested the money for the full five years. What was your annual compound rate of return off your original investment?

Question

Quizplus · Accepted Answer

The annual compound rate of return can be calculated using the formula FV = PV x (1+r)^n, where FV is the future value, PV is the present value, r is the annual compound rate of return, and n is the number of years. For this question, we know that PV = $1,000, FV = $1,043.29, n = 5, and the reinvestment rate is 5%. Solving for r in the formula, we get r = (FV/PV)^(1/n) - 1 = (1,043.29/1,000)^(1/5) - 1 = 0.0589 or 5.89%. Therefore, the answer is B.

You Purchased a Five-Year Annual Payment 6% Coupon Bond for $1,000