Question

Seven years ago the Templeton Company issued 21-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.

Answer 1

Answer:

Yield to Call: 12.68%

Explanation:

We will calculate the YTC

To do so we will list on exce lthe cash flow for the bond life:

0 -1000.0 (purchased at face value)

1 120.00 (coupon payment: 1,000 x 12%)

2 120.00

3 120.00

4      120.00

5 120.00

6 120.00

7 1190.00 (1,70 call price + 120 coupon payment)

below the cash flow we enter the IRR function and select the cash flow

this will give us the YTC: 0.126795

There is another way to calcualte the YTC but is done by approximation and is not an exact answer:

$YTM = \frac{C + \frac{P-F}{n }}{\frac{F+P}{2}}$

Coupon value = 120

Face value = 1,000

P = call = 1,070

n= 7 years

Result: 12.5603865%

as notice this differs with the excel answer as it is an aproximation nto an exact answer.