A mortgage bond issued by Automation Engineering is for sale for $8200. The bond has a face value of $10,000 with a coupon rate of 8% every six months, payable annually. What rate of return will be realized if the purchaser holds the bond to maturity 5 years from now

13%

Explanation:

The rate of return is the amount of interest paid on the left-over which is yet to be paid off the money being borrowed.

Thus, the periodic payment can be computed as:

Given that;

The bond face value V = $10,000

The coupon rate b = 8% per year = 0.08

Then, the periodic payment can be calculated as:

I = $800

Thus, the annual cashflow = $800

By using the Excel formula, we can then determine the rate of return realized if the purchaser holds the bond to maturity 5 years from now.

Using the Excel function =IRR(A1:A6)

The rate of return is calculated to be 13%

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