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Suppose you purchase a? 30-year, zero-coupon bond with a yield to maturity of 8%. You hold...

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Finance

Suppose you purchase a? 30-year, zero-coupon bond with a yieldto maturity of 8%. You hold the bond for five years before sellingit.

a. If the? bond's yield to maturity is 8% when you sell? it,what is the internal rate of return of your? investment?

b. If the? bond's yield to maturity is 9% when you sell? it,what is the internal rate of return of your? investment?

c. If the? bond's yield to maturity is 7% when you sell? it,what is the internal rate of return of your? investment?

d. Even if a bond has no chance of? default, is your investmentrisk free if you plan to sell it before it? matures? Explain.

Assume annual compounding.

Answer & Explanation Solved by verified expert
3.8 Ratings (540 Votes)
Solution Given Term of Bond ie Nper 30 Year Coupon Amount ie PMT 0 as Zero Coupon Bond Yield to Maturity 8 a If the bonds yield to maturity is 8 when you sell it what is the internal rate of return of your investment Assuming Face value of Bond 100 ie Future value of Bond at the end of 30th Year 100 Given Term of Bond ie Nper 5 Years Sold after 5 Years Coupon Amount ie PMT 0 Future value at the end of 30 th Year 100 Assumption Rate 8 We will first find the Present value of Bond ie Purchase Price of bond Using PV Function in excel we will calculate the PV ie Purchase value of Bond PV8300100 994 Purchase Value of Bond 994 Now will will calculate Sale Price of Bond after    See Answer
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Transcribed Image Text

Suppose you purchase a? 30-year, zero-coupon bond with a yieldto maturity of 8%. You hold the bond for five years before sellingit.a. If the? bond's yield to maturity is 8% when you sell? it,what is the internal rate of return of your? investment?b. If the? bond's yield to maturity is 9% when you sell? it,what is the internal rate of return of your? investment?c. If the? bond's yield to maturity is 7% when you sell? it,what is the internal rate of return of your? investment?d. Even if a bond has no chance of? default, is your investmentrisk free if you plan to sell it before it? matures? Explain.Assume annual compounding.

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