Compute the specified quantity. Round all answers to the...

Compute the specified quantity. Round all answers to the nearest month, the nearest cent, or the nearest $0.001 \%$, as appropriate.
Bonds A 5-year bond costs $\$ 1,000$ and will pay a total of $\$ 250$ interest over its lifetime. What is its annual interest rate?

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Key Concepts

Simple Interest

Simple interest refers to the method of calculating the interest charge on a principal amount without compounding. In problems like this, the total interest paid is evenly distributed across the time periods, making it straightforward to calculate the interest earned per period by dividing the total interest by the number of periods.

Annual Interest Rate

The annual interest rate is a percentage that represents how much interest is earned or paid in one year relative to the principal amount. It is calculated by taking the interest earned in one year and dividing it by the principal, then converting the result into a percentage, which is crucial for comparing the returns on different investments.

Bond Pricing

Bond pricing involves determining the return or yield that a bond provides based on its cost, interest payments, and time to maturity. Understanding the relationship between the purchase price of a bond, its interest payments (coupons), and the duration helps investors evaluate the bond’s attractiveness and compare it with other investment opportunities.

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