Question

You bought a bond five years ago for $935 per bond. The bond is now selling for $980. It also paid $75 in interest per year, which you reinvested in the bond. Calculate the realized rate of return earned on this bond. (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Realized rate of return = ? %

Answer 1

Realized Ret is the Ret at which PV of Cash inflows are equal to PV of Cash Outflows.

Year	Cash Flow	PVF/PVAF@8%	PV of Cash Flows	PVF/PVAF@9%	PV of Cash Flows
1-5	$                  75.00	3.9927	$                       299.45	3.8897	$                    291.72
5	$                980.00	0.6806	$                       666.97	0.6499	$                    636.93
PV of Cash Inflows			$                       966.42		$                    928.66
PV of Cash Oiutflows			$                       935.00		$                    935.00
NPV			$                          31.42		$                       -6.34

Realized rate of return = Rate at which least +ve NPV + [ NPV at that rate / Change in NPV due to Inc of 1% in Int Rate ] * 1%
= 0.08 + [31.42 / 37.77 ] * 1%
= 0.08 + [0.83 ] * 1%
= 0.08 + [0.0083]
= 0.0883
Realized rate of return = 8.83%

Please comment if any further assistance required.