Suppose you purchase a 30-year Treasury bond with a 7% annual coupon, initially trading at par....

Suppose you purchase a 30-year Treasury bond with a 7% annual coupon, initially trading at par. In 10 years' time, the bond's yield to maturity has risen to 8% (EAR). (Assume $100 face value bond.)

a. If you sell the bond now, what internal rate of return will you have earned on your investment in the bond?

b. If instead you hold the bond to maturity, what internal rate of return will you earn on your initial investment in the bond?

c. Is comparing the IRRs in (a) versus (b) a useful way to evaluate the decision to sell the bond? Explain.

(a)If you sell the bond now, what internal rate of return will you have earned on your investment in the bond?

the IRR of the bond is ………..%. (Round to two decimal places.)

b. If instead you hold the bond to maturity, what internal rate of return will you earn on your initial investment in the bond? The IRR of holding the bond to maturity is …………%. (Round to two decimal places.)

c. Is comparing the IRRs in (a) versus (b) a useful way to evaluate the decision to sell the bond? Explain. (Select the best choice below.)

A.Yes, IRR works for bonds, you should pick the choice with the lower IRR because this is effectively a loan

B.No, IRR is flawed. Use NPV.

C.Yes, IRR works for bonds. You should pick the choice with the higher IRR.

D.No, the two IRRs represent different returns for different time intervals.

Solutions

Expert Solution

I have answered the question below using excel and have attached the image below.

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Answer:

Option D

jeff jeffy answered 1 year ago

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