1. **State the problem:** An investor buys a bond with a face value of 1000, paying 5% annual interest, for 3 years. The investor sells it after 2 years for 950. We need to find the realized annual compound return. 2. **Formula used:** The compound annual growth rate (CAGR) formula is: $$\text{CAGR} = \left(\frac{\text{Ending Value}}{\text{Beginning Value}}\right)^{\frac{1}{n}} - 1$$ where $n$ is the number of years. 3. **Calculate Beginning Value:** The investor receives 5% interest annually on 1000, so after 2 years, the total value before selling is: $$1000 + 2 \times (0.05 \times 1000) = 1000 + 100 = 1100$$ 4. **Calculate CAGR:** Using the formula with Beginning Value = 1000, Ending Value = 950 + interest received, but since the investor sells at 950, the total return includes the interest payments received during the 2 years. The investor received $50 each year for 2 years, total $100 in interest, plus $950 from selling the bond. Total amount received after 2 years = $950 + $100 = $1050 Now calculate CAGR: $$\text{CAGR} = \left(\frac{1050}{1000}\right)^{\frac{1}{2}} - 1 = (1.05)^{0.5} - 1$$ 5. **Simplify:** $$ (1.05)^{0.5} = \sqrt{1.05} \approx 1.0247$$ 6. **Final answer:** $$\text{CAGR} \approx 1.0247 - 1 = 0.0247 = 2.47\%$$ The investor's realized annual compound return is approximately 2.47%.