Question

10 years ago the Singleton Company issued 30-year bonds with a 12.5% annual coupon rate at their $1,000 par value. The bonds had a 7.5% call premium, with 3 years of call protection. Today Singleton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. 7.50% 12.91% 13.83% 12.50%

Answer 1

12.91%

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

LI1 C Bond Face value (issue price) Annual coupon rate Call price Holding period (years) $1,000.00 12.50% $1,075.00 10 000 von AwN Realized rate of return for an investor 12.91%

Cell reference -

B -Nm Bond Face value (issue price) Annual coupon rate Call price Holding period (years) 1000 0.125 =C2*(1+0.075) 10 Realized rate of return for an investor =RATE(C5,-C3*C2, C2,-C4,0)

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.