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polet [3.4K]
3 years ago
10

This morning, you purchased a seventeen-year, 6.45% annual coupon bond with face value of $1,000 at a price of $1,030.04. Just a

fter purchasing the bond, the yield to maturity of the bond falls to 5.50 percent and stays at that level throughout your investment period. If you sell your bond after holding it for seven years, what will be your realized rate of return
Business
1 answer:
iogann1982 [59]3 years ago
8 0

Answer:

6.73%

Explanation:

the price of the bond in seven years is:

PV = $1,000 / (1 + 5.50%)¹⁰ = $585.43

PV of coupon payments = $64.50 x 7.538 (PVIFA, 5.5%, 10 years) = $486.20

market price = $1,071.63

using an excel spreadsheet of financial calculator, the annual rate of return:

year 0 = -1030.04

year 1 = 64.5

year 2 = 64.5

year 3 = 64.5

year 4 = 64.5

year 5 = 64.5

year 6 = 64.5

year 7 = 1136.13

IRR = 6.73%

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