Question

Calculating Rates of Return. Refer back to the Series EE savings bonds we discussed at the very beginning of the chapter. a) Assuming you purchased a $50 face value bond, what rate of return would you earn if you held the bond for 20 years until it doubled in value? b) If you purchased a $50 face value bond in early 2012 at the then current interest rate of .60 percent per year, how much would the bond be worth in 2022? c) In 2022, instead of cashing the bond in for its then current value, you decide to hold the bond until it doubles in face value in 2032. What rate of return will you earn over the last 10 years?

Answer 1

(a) holding period = 20 years

  Face value of bond = $ 50

Value of bond after 20 years = $50 * 2 = $ 100

Rate of Return on Bond = {($ 100 - $ 50) / $ 50}/ 20 years

= 5 % annually

(b) Value of Bond ( in 2020 ) = $ 50 +( $ 50 * 0.6 % *10 years)

= $ 50 + $ 3

in 2020 = $ 53

(c) in 2020 , instead of cashing the bond it holds for 2032 up to when value of bond doubled of its face value then rate of return for last 10 years -

Rate of Return = {($100 - $ 53) * 100 /$ 53} / 10 years

= { ($ 47 * 100 ) / $ 53 } / 10 years

= 8.868 % ( annually )