Question

An investor purchased a "par bond" for $500 with the principal $500. Over n = 6 years the bond will pay 2% coupon annually. Find the IRR of the cash flow stream (also called Yield to Maturity). Note: The bond has the following cash flow stream: at time zero payment $500 is made; for 6 years, at the end of each year the coupon payment (2/100)*500 is made; also at the end of year 6 the principal $500 is paid in addition to the last coupon.

Answer 1

Answer:

2.0%

Explanation:

Coupon received annually = $500*2% = $10

We have the cash flow from year 0 to year 6 as below:

Year 0 ($500)

Year 1 $10  

Year 2 $10  

Year 3 $10  

Year 4 $10  

Year 5 $10  

Year 6 $510   (Principal $500 & coupon $10)

IRR (internal rate of return) whereas  the present value of all cash flow is nil

It is very difficult to calculate IRR manually, but easily in excel = IRR(-500,10,10,10,10,10,510) = 2%

Please see excel attached

Download xlsx