Question

q8

Seven years ago the Templeton Company issued 20-year bonds with a 12% annual coupon rate at their $1,000 par value. The bonds had a 7% call premium, with 5 years of call protection. Today Templeton called the bonds. 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. % Why should or should not the investor be happy that Templeton called them? I. Investors should not be happy. 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. II. Investors should be happy. 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. II. Investors should be happy. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns. IV. Investors should be happy. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk. -Select-

Answer 1

1)

Function Arguments ? X RATE Nper 7 Pmt 120 PV -1000 FV 1070 Type o 1 1 1 1 1 = 7 = 120 = -1000 = 1070 = 0 = 0.126794545 Returns the interest rate per period of a loan or an investment. For example, use 6%/4 for quarterly payments at 6% APR. Type is a logical value: payment at the beginning of the period = 1; payment at the end of the period = 0 or omitted. Formula result = 12.68% Help on this function OK Cancel

Hence, Realized rate of return is 12.68%

2)

issuer of bonds will call the bonds only when market interest falls. When market interest rates fall, issuer calls the bonds and reissues them at lower rate. So investor should also reinvest at lower rate.

Hence, correct option is 1st option

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