Question

Suppose you purchase a​ ten-year bond with 5 % annual coupons.You hold the bond for four years and sell it immediately after receiving the fourth coupon. If the​ bond's yield to maturity was 3.03 % when you purchased and sold the​ bond, a. What cash flows will you pay and receive from your investment in the bond per $ 100 face​ value? b. What is the internal rate of return of your​ investment?

Answer 1

Answer:

$116.78

$110.66  

IRR is 3.03%

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Explanation:

The cash paid for the investment is the present  value of all cash flows including coupon and face  value promised by the bond discounted using the yield to maturity of 3.03%

=-pv(rate,nper,pmt,fv)

rate is the yield to maturity of 3.03%

nper is the number of annual coupon  payments receivable by bondholders which is 10

pmt is the annual coupon=$100*5%=$5

fv is the face value of $100

=-pv(3.03%,10,5,100)=$116.78  

Price after four years means that there are only six years left to maturity,hence, nper changes to 6

=-pv(3.03%,6,5,100)=$110.66  

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