Question

XZYY, Inc. currently has an issue of bonds outstanding that will mature in 16 years. The bonds have a face value of $1,000 and a stated annual coupon rate of 13.0% with annual coupon payments. The bond is currently selling for $1,176. The bonds may be called in 3 years for 113.0% of the par value. What is your expected quoted annual rate of return if you buy the bonds and hold them until maturity

Answer 1

Answer: 10.66%

Explanation:

The expected quoted annual rate of return when the bonds are bought and being held until maturity will be calculated thus:

Coupon payment = 1000 × 13% = 130

The Yield to Maturity formula will be:

= Rate(maturity period, coupon payment, -price, fave value)

= Rate(16, 130, -1176, 1000)

Yield to Maturity = 10.66%

Therefore, the expected quoted annual rate of return is 10.66%.