You pay $10,000 for a one-year bond with an original value of $10,000 and a single fixed payment of $800 at the end of the year. You hold the bond until the year is up, but during that time, the market price of the bond falls to $8,000. The interest rate on your investment is

Question

Quizplus · Accepted Answer

The interest rate on the investment can be calculated using the formula:

Interest rate = (Fixed payment + (Ending value - Initial value)) / Initial value

Plugging in the values given:

Interest rate = (800 + (8,000 - 10,000)) / 10,000 = -0.2

The negative value indicates a loss on the investment, and thus the interest rate is actually -2%, or -0.2 in decimal form.

Therefore, the best choice is B, 8 percent, which is not given as an option. The closest option is C, 10 percent, which is incorrect. None of the answer choices accurately reflect the interest rate on the investment.

You Pay $10,000 for a One-Year Bond with an Original