Bonds

A bond is a contract issued by a corporation or government to an investor that says that they will repay the money that they borrow with interest. Bonds are used to borrow small amounts of money from a large number of investors because it may be difficult to borrow a large amount from just one investor

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When returns are calculated they are always done as an annual rate and represented as a percentage of the original investment (Siegel & Yacht, 2009). Let me break this down into simple math. You will first subtract your initial investment from the end of year value. This will give you how much you have earned over the course of a year. The amount that you earned is then divided by the initial investment, which most likely will give you a decimal. To convert the decimal to a percentage you would multiply the decimal by 100. Just add a percent sign to whatever your answer is and you will have your rate of return for that year. Let’s say you buy a share of stock $100 dollars, at the end of the year the value is now $105, and you want to calculate the rate of return. You can see that you have earned five dollars. We need to express that as a percentage of your initial investment. You would divide the earnings by the initial investment (5 divided by 100) and you would get .05. If you multiple .05 by 100 and add a percent sign then you will get 5%. This is your annual rate of return. It is a little different when the stock pays dividends. Let’s say this same stock also paid a dividend of two dollars. What would be the return now? The earnings now would be seven dollars instead of five. You use the same formula to calculate the rate of return and it comes out to be 7%. You can also calculate a loss just by reversing the first step in the