You have decided to invest in a $5-$year bond.

The way a bond works is that you are making a loan to someone.

After loaning the money to someone $($a company, the government, etc$),$ you will get payments back every year $($dividend$).$ This is typically a percentage of the total loan $($or bond value$).$ During the last year, I get my original money back. For example, I have a $20\%$ bond worth $$5.$ My cash flows are:

Yr$0$: $-$$$5($I pay out for the bond$)$

Yr$1$: $$1(20\%)$

Yr$2$: $$1(20\%)$

Yr$3$: $$1(20\%)$

Yr$4$: $$1(20\%)$

Yr$5$: $$1(20\%)($ Final coupon payment$)$

Yr$5$: $$5($maturity date, I get my money back$)$

You are looking at purchasing a $$10,000$ bond that pays $7\%.$ When you purchase the bond, you will also need to pay a $3\%$ broker$$s fee when you purchase the bond and to cash it out at maturity.

a$.$ What is the IRR of this deal? Show your work $10$ pts

b$.$ Assume your money is losing value due to a $4\%$ inflation rate. Using ROI, what is your ROI? Show your work