Question

Again, Inc. bonds have a par value of $1,000, a 25 year maturity, and an annual coupon rate of 8.0% with annual coupon payments. The bonds are currently selling for $868. The bonds may be called in 6 years for 108.0% of par. What quoted annual rate of return do you expect to earn if you buy the bonds and company calls them when possible?

a) 9.39%
b) 12.21%
c) 13.42%
d) 10.13%
e) 8.30%

Answer 1

b) 12.21%

Step-by-step explanation:

The computation of the quoted annual rate of return is shown below:

Given that

Future value = $1,000 × 108% = $1,080

Present value = $868

NPER = 6 years

PMT = $1,000 × 8% = $80

The formula is shown below:

= RATE(NPER;PMT;-PV;FV;TYPE)

The present value comes in negative

After applying the above formula, the annual rate of return is 12.21%

Therefore the correct option is b.