Question

Wharton Health system issued 30-year bonds with an 8% annual coupon rate. The bonds were called after 7 years after the bond issuance for a $100 call premium (that is, bondholders received $1,100 for each bond). What is the realized rate of return for those investors who bought the bonds for $1,000 when they were issued?

Answer 1

# of years held to call, NPER Annual coupon payment, PMT Bond's initial selling price, PV Bond's call value today FV Annual coupon type, TYPE Bond's yield to call (YTC) 7 $80 ($1,000 x 8% --> As coupons are paid at coupon rate on par value] $1,000 (Given that the bonds were purchased at par initially] $1,100 [Par value of the bond + Premium] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period 9.08% [Ref: EXCEL SCREENSHOT] EXCEL SCREENSHOT: Bond's yield to call (YTC) is calculated using EXCEL FUNCTION RATE(nper,pmt,pv,fv, type) where nper=7; pmt=-80; pv=1000; fv=-1100; type=0; Here, pmt & fv are negative as they denote cash inflows; pv is positive as it denotes cash outflow; type = 0 as coupons pad at the end of each year only. B C D E F G H I J K А 1 # of years held to call, NPER 2 Annual coupon payment, PMT 3 Bond's initial selling price, PV 4 Bond's call value today FV 5 Annual coupon type, TYPE 6 Bond's yield to call (YTC) 7 =1000*8% ($1,000 x 8% --> As coupons are paid at coupon rate on par value] $1,000 (Given that the bonds were purchased at par initially] $1,100 [Par value of the bond + Premium) 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period =RATE(B1,-B2,B3,-B4,B5) [Ref: EXCEL SCREENSHOT]