Question

Six years ago the Templeton Company issued 21-year bonds with a 14% annual coupon rate at their $1,000 par value. The bonds had a 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

Par Value = 1000

Coupon = 14%

Premium Value = 1000 (1+0.09) = $ 1090 OR

Current Price = 1090

Maturity = 9 years

Let's assume the YTM be 12%

Value of Bond =

=

= 745.95497088 + 360.61002496

= 1106.56

Now,

Let's assume the YTM be 13%

Value of Bond =

=

= 718.43171792 + 332.88483336

= 1051.32

YTM =

= 12% + ((1106.56 - 1090) / (1106.56 - 1090) + (1090 - 1051.32)) * (13-12)

= 12% + (16.56 / 55.24) * 1

= 12% + 0.29978276611

= 12.30%

Realised Rate of Return = 12.30%