This question contains the answers. Show me in EXCEL how to get $515.87.

Immediately after the bond was purchased, market rates fell to 6%. Given she can only invest her coupons at 6% what is the actual realized return on her investment? (Hint: Find the terminal (future) value of her coupons and the par value at maturity. Then find the rate of return that equates the price with the terminal value.) How does the actual realized return compare with the expected rate of return?

Find the terminal value of coupons

Payment = 9% ( $1,000) / 2 = $45.00

Number of payments = 5 ( 2) = 10

Compound rate = 6%/2 = 3%

Compute future value coupons = $515.87

Future value of coupons plus par = $1,515.87

Compute the compound rate that equates present value of $1,000 with future value of $1,515.87 over 10 periods with no annuity payments.

Computed semiannual rate 4.25%

Effective actual realized annual rate = 8.68%