Question
1. Suppose you purchased a 30-year treasury bond (face value of $1,000) with a 6% annual coupon ten years ago at par. Today the bond's
1. Suppose you purchased a 30-year treasury bond (face value of $1,000) with a 6% annual coupon ten years ago at par. Today the bond's yield to maturity has risen to 8% (EAR).
a) If you hold this bond to maturity (i.e., 10 more payments to receive), what is the internal rate of return you will earn on your investment?
b) If you sell this bond now, what is the internal rate of return you will earn on your investment? (Write down the formula that you will use. To get the IRR, use Excels rate function in chapter 6 to calculate IRR.)
2. The FrodoNeo Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 10% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $1112, what is the YTM for this bond? (You can use excel for this question. In the exam, you cannot use excel so you will write down formula correctly).
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