Michael decided to buy a strip bond for his RRSP.He purchased a three year $5000 face bond for $3777.What is the annualized return on this investment?

Question

Quizplus · Accepted Answer

To find the annualized return, we need to use the formula:

Annualized Return = (Face Value/Purchase Price)^(1/years) - 1

In this case, face value = $5000, purchase price = $3777, and the bond has a three-year term. Plugging in these values, we get:

Annualized Return = (5000/3777)^(1/3) - 1 
= 1.098 - 1 
= 0.098 or 9.8%

Therefore, the annualized return on this investment is 9.8%. The correct answer is B.

Michael Decided to Buy a Strip Bond for His RRSP