Suppose you purchase a 30-year Treasury bond with a 5% annual coupon, initially trading at par. In 10 years' time, the bond's yield to maturity has risen to 8% (EAR). ?(Assume $ 100 face value bond.)
a. If you sell the bond now, what internal rate of return will you have earned on your investment in the bond?
b. If instead you hold the bond to maturity, what internal rate of return will you earn on your initial investment in the bond?
c. Is comparing the IRRs in (a) versus (b) a useful way to evaluate the decision to sell the bond? Explain.