Question
Investment opportunity A will require a principal of $1,000 and will yield $200 of the course of 4 years. Investment opportunity B will require a
Investment opportunity A will require a principal of $1,000 and will yield $200 of the course of 4 years. Investment opportunity B will require a principal of $1,600 and will pay $400 over a five year period. Which of the following statements is true?
-Investment A has a higher average annual rate of return than does Investment B. Ignore the time value of money.
-Given this information, the average annual rates of return cannot be computed.
-Investment A has a lower average annual rate of return than does Investment B.
-The average annual rates of return of the two investment opportunities are equal.
Refer to previous question. Suppose that Investment A was a piece of land that you purchased for $1,000 and sold for it $1,200 four years later. Assuming you are in the 35% tax bracket and long term capital gains are taxed at 20%, your net average annual rate of return on investment would be:
-1.75%
-4.25%
-3.25%
-4%
Refer again to question. Suppose that Investment B was a conventional bond that pays $80 yearly. If you held the bond for the entire 5 years, your net average annual rate of return on investment would be?
-3.25%
-1.75%
-4.25%
-4%
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