Suppose you purchase a ten-year bond with annual coupons. You hold the bond for four years and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was when you purchased and sold the bond, a. What cash flows will you pay and receive from your investment in the bond per face value? b. What is the internal rate of return of your investment?

Explanation:

The Full question is "Suppose you purchase a 10-year bond with 6% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond’s yield to maturity was 5% when you purchased and sold the bond, what cash flows will you pay and receive from your investment in the bond per $100 face value?"

Face Value = $100  

YTM = 5%

Annual Coupon = 6% * $100 = $6

Purchase Price = $6*PVIFA(5%, 10) + $100*PVIF(5%, 10)

Purchase Price = $6*(1-(1/1.05)^10)/0.05 + 100/1.05^10

Purchase Price = $107.72

Selling Price = $6*PVIFA(5%, 6) + $100*PVIF(5%, 6)

Selling Price = $6*(1-(1/1.05)^6)/0.05 + 100/1.05^6

Selling Price = $105.08

Cash Outflow at Year 0 = $107.72  

Cash Inflow at Year 1 = $6

Cash Inflow at Year 2 = $6

Cash Inflow at Year 3 = $6

Cash Inflow at Year 4 = $6 + $105.08 = $111.08

B.  The internal rate of return of your investment = 5.001% (Find attach the calculation)

d. the economy will face inflation.

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