Question

Nine years ago the Templeton Company issued 19-year bonds with an 11% annual coupon rate at their $1,000 par value. The bonds had an 9% call premium, with 5 years of call protection. Today Templeton 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. Round your answer to two decimal places.

Answer 1

Solving for 'y' in picutre, we get the yield y as 11.59%. This is the realized rate of return for the investor.

Other method to solve is to calculate the Present value of all the cash flows over the years and find the rate for which the sum of cash flows is 1000 (price of the bond).

The cash flows are

1. 55$ each for 18 periods (semi annual coupons for 9 years)

2. 1090 at the end of 18 periods ( face value + call premium)