Question

4. Bond Valuation Suppose you invest $3500 today and receive $9500 in five years. a. What is the IRR of this opportunity? b. Suppose another investment opportunity also requires $3500 upfront, but pays an equal amount at the end of each year for the next five years. If this investment has the same IRR as the first one, what is the mount you will receive each year?

Answer 1

1.
=(Future Value/Present Value)^(1/t)-1
=(9500/3500)^(1/5)-1
=22.1043%

2.
=Investment*rate/(1-1/(1+rate)^t)
=3500*22.1043%/(1-1/(1+22.1043%)^5)
=1224.947891

3.
=Coupon rate*Par value/yield*(1-1/(1+yield)^t)+Par value/(1+yield)^t
=11%*1000/5%*(1-1/1.05^10)+1000/1.05^10
=1463.304096

4.
=11%*1000/5%*(1-1/1.05^9)+1000/1.05^9+11%*1000
=1536.469301

5.
=11%*1000/5%*(1-1/1.05^9)+1000/1.05^9
=1426.469301