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A 4000 bonl matures in lo ycaS and pays 2 perceat inerest twis a year. If the bond is sole( for 200 what is the annual investnent rate (IRR)? ncinferest twiES yea.
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Answer #1

The bonds investment rate, the bonds coupon payment and the price of the bond are related as follows

The semi-annual coupon payment = 2% of $ 9000

The semi-annual coupon payment = $ 180

The maturity value of the bond M = $ 9000

Current bond price = $7000

Solving for r i.e. the investment rate

20 7000-Σ180 (1+r) + 9000 (1+r)20 t-1

The semi-annual investment rate = 3.57%

The annual investment rate = 3.57% x 2

The annual investment rate = 7.15%

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