Question

IDBI came out with an issue of deep discount bonds in the year 2000. The bonds were offered at a deep discounted rate of Rs. 12750. The maturity period of the bonds was 30 years with a maturity value of Rs. 500000. Determine the rate of return on the investment

Answer 1

The annual rate of return on the IDBI deep discount bonds is approximately 23.91%, calculated using the formula for the compound annual growth rate (CAGR).

Step-by-step explanation:

The student asked to determine the rate of return on an investment in IDBI deep discount bonds which were issued in the year 2000 at a price of Rs. 12750 and which will mature at Rs. 500000 after 30 years. To calculate the rate of return, we need to use the formula for compound annual growth rate (CAGR), which is:

CAGR = (Ending Value/Beginning Value)^(1/n) - 1

where 'Ending Value' is the value of the investment at the end of the holding period, 'Beginning Value' is the value of the investment at the start, and 'n' is the number of years.

Plugging the values into the formula, we get:

CAGR = (500000/12750)^(1/30) - 1 = (39.2157)^(1/30) - 1 = 0.2391 or 23.91%

Therefore, the annual rate of return on the investment is approximately 23.91%.