Final answer:
The current dollar internal rate of return (IRR) for the bond cannot be calculated without additional information. Linear interpolation between given discount rates requires present values at these rates, which are not provided in the question. Further, the impact of the expected 7% inflation rate on the calculations has not been addressed.
Step-by-step explanation:
Calculating the Current Dollar Internal Rate of Return
To calculate the current dollar internal rate of return (IRR), we would need to find the discount rate that makes the present value of the bond's cash flows equal to its current price. The bond pays $8,000 per year for the next 10 years and costs $72,000 now. The method provided suggests linear interpolation between two discount rates, x1 at 1.95% and x2 at 2.00%. Unfortunately, without the present values or a specific formula that correlates these discount rates with their respective present values, calculating the exact IRR using linear interpolation cannot be completed. Also, the inflation rate of 7% complicates the calculation as it would require adjusting the cash flows for inflation to find the real rate of return.
Linear interpolation generally involves finding two discount rates where one rate results in a present value above the current price, and the other below it. After establishing these rate bounds, interpolation can estimate the IRR. However, the question does not provide the necessary present values at the given rates for the interpolation calculation.
For bond valuation, typically calculations are compared to market interest rates, which may also influence the bond's price. For example, if a bond's coupon rate is below the current market interest rate, the bond will likely be priced at a discount, as shown in the provided reference where a $1,000 bond with future payments valued at $1,080 because of interest plus principal repayment would not sell for more than $964 in a 12% interest market.
Overall, to accurately calculate the current dollar IRR, additional information or present value figures at the specified discount rates would be required.