Price = FV / (1 + i)^n + Pmt x (1 - 1 / (1 + i)^n) / i
Price = 975
n=3
i= discount rate%
FV = 1000
Pmt = interest 1= 1000 x 7% = 70
975 = 1000 / (1 + i)^3 + 70 x (1 - 1 / (1 + i)^3) / i
The IRR is the value of i which makes the present value of the cash flows equals to the price,
You cannot solve the above for i directly you have to use trial and error
The excel RATE function will give you an answer
=RATE(3,70,-975,1000) = 7.9696%
Suppose you purchase a 3 year bond with face value of $1000, a 7% annual coupon, and a price of $975. Assuming you hold the bond to maturity, what is the IRR?
Here is what I have:
1000/975= (1 +IRR)^3
IRR= 0.00847 or .847%
Now, that percentage seems extremely low. Could someone verify that this is correct or shed light on what I did wrong? Thank you!
