Question

37

Again, Inc. bonds have a par value of $1,000, a 25 year maturity, and an annual coupon rate of 8.0% with annual coupon payments. The bonds are currently selling for $868. The bonds may be called in 6 years for 108.0% of par. What quoted annual rate of return do you expect to earn if you buy the bonds and company calls them when possible?

9.39%

12.21%

13.42%

10.13%

8.30%

Answer 1

Let the required quoted rate of return be R

Par Value = $1000, Call Price = 108% of Par = 1.08 x 1000 = $ 1080, Time to First Call = 6 years and Annual Coupon Rate = 8%

Annual Coupon = 0.08 x 1000 = $ 80

Current Bond Price = $ 868

Therefore, 868 = 80 x (1/R) x [1-{1/(1+R)^(6)}] + 1080 / (1+R)^(6)

Using trial and error method/EXCEL's Goal Seek Function to solve the above equation we get:

R = 0.1221 or 12.21 %

Hence, the correct option is (b)