19.

You just paid $918.38 for a 8 year, 7% semi-annual coupon bond, with a face value of $1000. The first coupon will be paid to you in 6 months. You expect to hold the bond for 3 years, and then sell the bond immediately after collecting the 6^th semi-annual coupon payment. You expect to sell the bond for $966.67.

If true, then what is the holding period return (expressed as an effective annual rate), for your three year investment? Express you answer as a decimal, not as a percent, using at least 4 significant digits.

HINT: The question is asking for the IRR (expressed as an EAR) for the 3 years you plan to own the bond (i.e. its asking for a holding period yield).

Start by construction a good timeline that shows all cash flows from t = 0 to t = 3, and from that write the corresponding NPV = 0 equation. Youll want to solve for r (which is an effective 6-month IRR because the cash flows occur every 6 months). However, youll notice that its literally impossible to solve for r via algebra. However, Excels IRR command can do the math (not via algebra, but rather via Linear Interpolation as discussed in Appendix 5-A). Therefore, youll need to use Excel to find the 6-month effective IRR. As a final step, youll need to convert the 6-month effective IRR into an effective annual IRR. Remember to express your answer as a decimal, not as a percent.