Question

You have just been offered a 12% bond for $1150. These bonds mature in 6 years. Find the required rate of return.

Answer 1

Rate of return of a bond is the internal rate of return earned by investor.

Bond price is the initial year cash outflow.

Periodic cash flow = Face value x coupon rate = $1,000 x 0.12 = $ 120

Last period cash flow = Face value + coupon amount = $ 1,000 + $ 120 = $ 1,120

IRR can be computed using excel as:

	A	B
1	Year	Cash flow
2	0	$          (1,150)
3	1	$                  120
4	2	$                  120
5	3	$                  120
6	4	$                  120
7	5	$                  120
8	6	$               1,120
9	IRR	8.687%

If above table is excel sheet, use formula “=IRR(B2:B8) in cell B9 to get IRR as 8.687%

Rate of return of the bond is 8.687%