Question

Seven years ago the Tempieton Company issued 22 -year bonds with a 12% annual coupon rate at their $1,000 par value, The bonds had a 7% call premlume wath 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 lssued and held them until they were called. Round your answer to two decimal places.

Answer 1

To calculate the realized rate of return for an investor who purchased the Templeton Company bonds when they were issued and held them until they were called, we need to consider the face value of the bonds, the coupon payments received, and any capital gains or losses.

Step-by-step explanation:

When calculating the realized rate of return for an investor who purchased the Templeton Company bonds when they were issued and held them until they were called, we need to consider the face value of the bonds, the coupon payments received, and any capital gains or losses. In this case, the face value is $1,000, the coupon rate is 12%, and there is a call premium of 7% with 5 years of call protection. To calculate the realized rate of return, we need to determine the price the investor would receive when the bonds are called. This is equal to the face value plus the call premium. So, the price would be $1,000 * (1 + 0.07) = $1,070. The total return for the investor would be the sum of the coupon payments received and the capital gains or losses, which in this case is ($1,070 - $1,000) + (7 * $1,000 * 0.12) = $70 + $84 = $154. The realized rate of return is then calculated by dividing the total return by the original investment, which is $154 / $1,000 = 0.154 or 15.4%.