Interest rate on the bond is 5%.
The price of the bond is $50 and the holder of the bond is recieving $2.50 each year.
The $2.50 is the interest which the government is paying to the bond holder.
Thus, the interest rate on the bond is calculated as 2.5/50 = 0.05 or 5%.
A firm or any government can issue bonds in order to raise money for investment or either to cover expenses. In any case, if they borrow money from any lender by issuing the bond. The lender charges and receives interest in return for providing the funds.
Bonds are the debt instruments in which the investor gives money as a loan to any entity. The entity always borrows money at a fixed interest rate for a specific time duration. Any entity can be government, banks or corporates.
Hence, when the bonds are issued by government, they are known as government bonds.
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