Problem #2: Consider an investment where the cash flows are:
– $779.50 at time / = 0 (negative since this is your initial investment) $251 at time t = 1 in years $373 at time / = 2 in years $224 at time t = 3 in years
a. Use Excel’s Solver to fmd the internal rate of return (IRR) of this investment. Take a screen shot showing Solver open with your entries for the function clearly visible. Paste the screen shot into an application (like Paint), and save it as a (.png) file. Upload your screenshot below.
b. What is the value of IRR found by Solver?
Problem #3: A 4 year bond has semiannual coupons of 14% per annum. The continuously compounding yield is 19%. The bond has a face value of $100. You will be pricing the bond initially, and at future times throughout the life of the bond as it pulls to par at maturity, using the same continuously compounding yield throughout.
Since the yield is given with continuous compounding, the usual formulas will not work without changing the yield to the equivalent discrete frequency. Instead, string out the cash flows (each of the coupons separately plus the final redemption value) in the columns of a spreadsheet similar to the one shown here. Each row will compute the bond price at a different point in time:
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