Question

What is the rate of return for an investor who pays

$1,054.47for a three-year bond with a 7% coupon ansd sells the bond
one yearlater for $1,037.19?

Answer 1

The rate of return for the investor is 4.95 %.

Explanation:

The required rate of return can be determine with the help of IRR formula given below. To use the formula first we have to calculate NPV using one two rates that is 5% and 10%.

NPV (5%)= (-$1,054.47) +(1000*7%*0.952) + ($1,037.19*0.952)

= -0.42512

NPV (10%) = (-$1,054.47) +(1000*7%*0.909) + ($1,037.19*0.909)

=-48.03

IRR= 5% + (-0.43)/-0.43+48.03) * (10%-5%)

= 4.95 %