Question

Suppose you purchase a​ ten-year bond with 11 % 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 10.67 % 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?

Note​: Assume annual compounding.

Answer 1

Step 1: Find the purchase price of bond now

Step 2: Find the sale price of bond 4 years from now

The above two steps can be done both by excel functions and also using TVM (Time value of money) equations. Have worked out on both as below:

Thus, purchase price of Bond now is $101.97 and sale price of bond after 4 years is $101.41

Workings:

a. What cash flows will you pay and receive from your investment in the bond per $ 100 face​ value?

The cash flows will be as follows:

Year	Cash Flow	Remarks
0	($101.97)	Bond Price now on purchase
1	$11.00	Yearly coupon = $100*11%
2	$11.00
3	$11.00
4	$112.41	Bond Price on sale after 4 years ($101.41) + yearly coupon of $11

b. Internal Rate of Investment:

Year	Cash Flow	Remarks
0	($101.97)	Bond Price now on purchase
1	$11.00	Yearly coupon = $100*11%
2	$11.00
3	$11.00
4	$112.41	Bond Price on sale after 4 years ($101.41) + yearly coupon of $11
IRR	10.67%	=IRR(I16:I20)

Thus, Internal rate of the investment = 10.67%