Suppose that you have purchased $10,000 of a 5-year U.S. government bond that pays you an annual
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Question:
Suppose that you have purchased $10,000 of a 5-year U.S. government bond that pays you an annual rate of 3%. At the end of each year you get $300, and by the end of the 5-th year, you also get your principle (of $10,000) back. What is the arithmetic annual rate of return for your investment?
What is the geometric annual rate of return?
In order to answer these questions, you need to assume that the $300 interest is either
(a) as cash in your pocket that earn no interest or
(b) re-invested at the same rate of interest of 3% in the same type of government bonds or other investment vehicles
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