37
Again, Inc. bonds have a par value of $1,000, a 25 year maturity, and an annual coupon rate of 8.0% with annual coupon payments. The bonds are currently selling for $868. The bonds may be called in 6 years for 108.0% of par. What quoted annual rate of return do you expect to earn if you buy the bonds and company calls them when possible?
9.39% |
12.21% |
13.42% |
10.13% |
8.30% |
Let the required quoted rate of return be R
Par Value = $1000, Call Price = 108% of Par = 1.08 x 1000 = $ 1080, Time to First Call = 6 years and Annual Coupon Rate = 8%
Annual Coupon = 0.08 x 1000 = $ 80
Current Bond Price = $ 868
Therefore, 868 = 80 x (1/R) x [1-{1/(1+R)^(6)}] + 1080 / (1+R)^(6)
Using trial and error method/EXCEL's Goal Seek Function to solve the above equation we get:
R = 0.1221 or 12.21 %
Hence, the correct option is (b)
37 Again, Inc. bonds have a par value of $1,000, a 25 year maturity, and an...
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