Question

Assume that at the beginning of the year, you purchase an investment for $2,500 that pays $67 annual income. Also assume that th investment's value has decreased to $2,350 at the end of the year. a. What is the rate of return for this investment? b. Is the rate of return a positive or a negative number? Complete this question by entering your answers in the tabs below. What is the rate of return for this investment?

Answer 1

The rate of return for the investment is -3.32%; it is a negative number because the final value of the investment is less than the initial value after accounting for the income, indicating a loss.

Step-by-step explanation:

To calculate the rate of return on the investment mentioned, you subtract the final value of the investment from the initial value plus any income generated, and then divide by the initial value of the investment. Applying this to the given scenario:

Initial Value = $2,500
Final Value = $2,350
Annual Income = $67

Total return = (Final Value - Initial Value) + Annual Income
Total return = ($2,350 - $2,500) + $67 = -$150 + $67 = -$83

Rate of return = (Total return / Initial Value) × 100%
The rate of return = (-$83 / $2,500) × 100% = -3.32%

Here, the rate of return is a negative number because the final value of the investment is less than the initial value, even after accounting for the annual income. This indicates a loss on the investment.