Question

Seven years ago the Templeton Company issued 20-year bonds with an 11% annual coupon rate at their $1,000 par value. The bonds had a 7.5% 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. Explain why the investor should or should not be happy that Templeton called them.

Answer 1

Answer:

11.5%

Explanation:

we are given the following information:

• present value = $1,000
• future value = $1,050
• coupon = $1,000 x 11% = $110
• n = 7
• rate = ?

to determine the interest yielded by the annuity, we can use an excel spreadsheet and the RATE function =RATE(7,110,-1000,1050) = 11.5%

Investors should be happy with Templeton's decision because it increased the rate of return from 11% to 11.5%, so they made more money.