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(b) Now suppose you have purchased a 3-year bond with face value of $1000, a 7% annual coupon, and a price of $975. Assuming that you hold the bond to maturity, is the IRR greater or less than the return on the bond in part (a)?

Respuesta :

Answer:

IRR is greater than the annual return in a

Explanation:

Assuming the bond is held to maturity, firstly it is significant to calculate IRR, which is as follows:

Using financial calculator

Input: Face Value = 1000

N = 3

PV = $975

PMT = 7%*1000 = 70

Solve for I/Y as 7.97

Rate = 7.97%

IRR is hence greater than the annual return in a.

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