(1) Percentage rate of return is calculated by taking the gain on the investment divided by the initial investment, multiplied by 100. In this case, you would have a

gain of $280 ($1,275-$995), and your rate of return would be 28.2% (280/995*100).
(2) If you sell the bond before maturity, you face the risk of interest rate risk. Interest rate risk refers to the risk that the value of a bond will decrease due to a rise in interest rates. If interest rates rise, the value of existing bonds with lower yields will

decrease, and this will decrease the price of the bond, which will impact the return of

the bond if sold before maturity.

(3) If you held the bond until maturity, you would not face the same type of risk. When a bond reaches maturity, the issuer of the bond will pay the face value of the bond, which is $1,000 in this case, regardless of the market interest rates. So, as long as the issuer can pay the face value, the bond holder will not be affected by the interest rate.

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(4) To calculate the real interest rate, you would subtract the inflation rate from the nominal interest rate. In this case, the real interest rate would be -2% (2% -4%). A pensioner, or any investor, would not want to buy this bond because the real interest rate is negative. Negative real interest rate means that the return on the bond is lower than the inflation rate, so the purchasing power of the money invested will decrease over time. It means that a pensioner would lose money on the bond investment in real terms.

Answer rating: 100% (QA)

1 Percentage rate of return is calculated by taking the gain on the investment divided by the initial investment multiplied by 100 In this case the ga... View the full answer