Question

Nine years ago the Templeton Company issued 29-year bonds with an 11% 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.

1. 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.
   
     %
   
2. Why the investor should or should not be happy that Templeton called them.
   1. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates.
   2. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.
   3. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns.
   4. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk.
   5. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.

Answer 1

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- 2x HIA BOND - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri -11AA = = = Dr Wrap Text General E Copy Fill Paste BI U. 3 A * SF Merge Merge & Center Center $ - % % 4:0 .00 Format Painter 8. Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing H0331 - for Formula Bar AHH HІНІ HK HL HN HO HP HQ HR HS TTIVT 329 templeton 330 331 332 FACE VALUE 1000 333 LIFE COMPLETED 334 COUPON 11.00% 335 COUPON ($) 110 CALL PREMIUM 9% CALL PRICE 1090 (1000 + 9% OF 1000) 338 339 realised rate of return 11.62% [=RATE(HL333, HL335,-HL332,HL337)] 340 341 V. INVESTORS SHOULD NOT BE HAPPY SINCE BONDS HAVE BEEN CALLED INTEREST RATES MUST HAVE FALLEN SUFFICIENTLY 342 5TH SUCH THAT YTC IS LOWER THAN YTM OPTION IF INVESTORS WISH TO REINVEST THEIR INTEREST, IT WILL BE AT LOWER RATE 344 9 336 337 343 345 346 347 H Rea Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE 510 BIDDING, UNDERWRITING EUAC AW LIFELP, IP, MRP, INFLATION WARRANT refund YIELD SPOT 1 ferences 54 55 56 I BOU 130% I -_ 0 1a e 9 E S w x Dom .mx 4 0 ENG 07:13.1 29-10-2019