Question

Seven years ago the Templeton Company issued 28-year bonds with an 11% annual coupon rate at their $1,000 par value. The bonds had a 5% 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

realized rate of return = 11.5%

No. of years held to call,NPER	7	(from the year bond initially held to the current year when bond is called)
Annual coupon payments PMT	110	(1000 x 11% as coupon are paid on bond's par value)
Bonds initial value PV	1000	(bond's par value)
Bonds call value today FV	1050	(1000 x 105% as it involves 5% call premium)
BOND'S YIELD TO CALL (YTC)	11.50%
Bond's YIELD TO CALL (YTC) is calculated using excel function rate (nper,pmt,pv,fv,type) where nper = 7 , pmt = 110
pv = 1050 , fv = 1000 here the value of pmt and fv is negative as they denote inflows pv is positive as it denote outflows
type = 0 as coupon are paid year end