Isabella buys a $1,000 bond that matures in 10 years (that is, she lends $1,000 to the U.S. Treasury for 10 years). The bond pays her $50 every year for 10 years. When the bond matures at year 10, she will receive her $1,000 back as well as her last interest payment of $50.What is the annual interest rate (or yield) on Isabella's bond?
is it 50/1000= 5% yield
Yes. You're right.
To calculate the annual interest rate or yield on Isabella's bond, we need to determine what rate of return she is getting on her investment.
In this case, Isabella buys a $1,000 bond and receives $50 interest payments every year for 10 years. At the end of the 10-year period, she also receives her initial investment of $1,000 back as well as her last interest payment of $50.
To calculate the annual interest rate or yield, we first need to find the total amount of interest Isabella will receive over the 10-year period. She receives $50 in interest annually for 10 years, so the total interest income is $50 x 10 = $500.
Next, we need to consider Isabella's initial investment of $1,000, which she will also receive back at the end of the 10-year period. Therefore, the total amount Isabella will receive at the end of the 10 years is $500 (total interest income) + $1,000 (initial investment) = $1,500.
To calculate the yield, we can divide the total interest income by the initial investment and express it as a percentage:
Yield = (Total interest income / Initial investment) x 100%
Yield = ($500 / $1,000) x 100% = 0.5 x 100% = 50%
Therefore, the annual interest rate or yield on Isabella's bond is 50%.