Taussig Corp.'s bonds currently sell for $1,150. They have a 6.35% annual coupon rate and a 20-year maturity, but they can be ca
lled in 5 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds?
1 answer:
Answer:
4.20%
Explanation:
In this question, we use the Rate formula which is shown in the spreadsheet.
The NPER represents the time period.
Given that,
Present value = $1,150
Future value = $1,067.50
Assuming Par value = $1,000
PMT = 1,000 × 6.35% = $63.50
NPER = 5 years
The formula is shown below:
= Rate(NPER;PMT;-PV;FV;type)
The present value come in negative
So, after solving this, the rate of return is 4.20%
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The question is incomplete. The complete question is :
You want to be able to withdraw the specified amount periodically from a payout annuity with the given terms. Find how much the account needs to hold to make this possible. Round your answer to the nearest dollar.
Regular withdrawal $ 2200
Interest rate 2%
Frequency Monthly
Time 20 years
Solution :
Given :
Monthly withdrawal = $ 2200
Interest rate = 2%
Frequency = monthly
Time = 20 years
= 20 x 12 = 240 months
Formula used :
with Z = 1 + r
where, w = monthly withdrawal
P = principal amount
r = monthly interest rate
Y = Number of months
So, w = 2200
r = 2% = 0.02
Z = 1 + r
= 1 + 0.02 = 1.02
Y = 240
Therefore,
= 111,231829
≈ 111,232 (rounding off)
Thus, the account balance = $ 111,232