Personal Finance 1st Edition by Jack R. Kapoor

Exercise 19

Calculating Rate of Return. Assume that at the beginning of the year, you purchase an investment for $7,000 that pays $100 annual income. Also assume the investment’s value has decreased to $6,600 by the end of the year. (Obj. 2)

a. What is the rate of return for this investment?

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b. Is the rate of return a positive or negative number?

Step 1 of 2

a.       What is the rate of return for this investment?

Step 1: Subtract the investment’s initial value from the investment’s value at the end of the year.

$6,600 – $7,000 = $400 (negative)

Step 2: Add the annual income and the amounts from Step 1.

$400 (negative) + $100 = $300 (negative)

Step 3: Divide the total dollar amount of return (Step 2) by the original investment

$300 (negative) ÷ $7,000 = .043 (negative) = 4.3% (negative)