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A bondholder purchased an 10 percent coupon, $1,000 par three-year bond at a 7 percent yield....

A bondholder purchased an 10 percent coupon, $1,000 par three-year bond at a 7

percent yield. Interest rates then immediately fell to 6 percent and his bond was called

at a price of $1,080. He reinvested his money and earned 6 percent on the $1,080 for

three years.

  1. Did the call help or hurt the bondholder?
  2. What was his three-year rate of return on his original investment?
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