Question

Six years ago the Templeton Company issued 24−year bonds with a 15% annual coupon rate at their $1,000 par value. The bonds had a 9% 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 they were issued and held them until they were called. Round your answer to two decimal places. %

Answer 1

The realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called is 99.50%.

Step-by-step explanation:

The realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called can be calculated as follows:

1. Calculate the annual interest payment by multiplying the coupon rate by the par value of the bond. In this case, the annual interest payment is $150 ($1000 * 0.15).
2. Calculate the total interest received over the holding period. Since the bond was held for 6 years, the total interest received is $900 ($150 * 6).
3. Calculate the call premium by multiplying the par value of the bond by the call premium rate. In this case, the call premium is $90 ($1000 * 0.09).
4. Add the total interest received and the call premium to the original investment to get the total return. In this case, the total return is $1990 ($1000 + $900 + $90).
5. Calculate the realized rate of return by dividing the total return by the original investment and multiplying by 100 to convert to a percentage. In this case, the realized rate of return is 99.50%.