Absalom Motors's 12% coupon rate, semiannual payment, $1,000 par value bonds that mature in 20 years are callable 3 years from now at a price of $1,075. The bonds sell at a price of $1,252, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of investror's rate of return?
A 9.22%
B 4.61%
C 9.33%
D 5.17%
E 2.58%
Correct option is > D. 5.17%
Using financial calculator BA II Plus - Input details: |
# |
FV = Call price = |
$1,075.00 |
PV = Bond price = |
-$1,252.00 |
PMT = Coupon = |
$60.00 |
N = Year to call x coupon frequency = |
6 |
CPT > I/Y = Rate Semiannual = |
2.584 |
Yield to call or Return Investors should expect to earn in % = 2.584 x 2 /100 |
5.17% |
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