A bond has a face value of $8000. The bond stipulates a fixed nominal interest rate of 8% per year, paid every 3 months, over its 10 year life.
a. If you were to buy this bond at a price of $7500, determine your quarterly IRR, your nominal rate of return, and your effective rate of return. Briefly describe in plain English what each of these values means. You can use Excel for the IRR calculation, but manually show your work for the nominal and IRR calculations. If you use Excel, upload your file to Moodle or email it to me.
b. Assuming the same purchase price of $7500, and a nominal MARR of 12% per year, calculate the quarterly ERR manually, and in MS Excel. Also calculate the nominal and effective ERR. Please upload your file to Moodle, or email it to me. Briefly explain in plain English what this value means, and why it differs from the IRR calculated in part “a”.