Questions: Compute the total and annual returns on the following investment. You pay 5500 for a municipal bond. When it matures after 20 years, you receive 11,400.
The total return is %.
(Do not round until the final answer. Then round to one decimal place as needed.)
Transcript text: Compute the total and annual returns on the following investment.
You pay $\$ 5500$ for a municipal bond. When it matures after 20 years, you receive $\$ 11,400$.
The total return is $\square$ $\%$.
(Do not round until the final answer. Then round to one decimal place as needed.)
Solution
Solution Steps
Step 1: Calculate the Total Return
To find the total return on the investment, we calculate the percentage increase from the initial investment to the final amount received. The formula for total return is:
Total Return=(Initial InvestmentFinal Amount−Initial Investment)×100
Substituting the given values:
Total Return=(550011400−5500)×100=107.2727%
Rounding to one decimal place, the total return is 107.3%.
Step 2: Calculate the Annual Return
To find the annual return, we use the formula for compound interest to determine the equivalent yearly growth rate that would result in the total return over the investment period. The formula is: