Question

Seven years ago the ATT issued 20-year bonds with an 11% annual coupon rate at their $1,000 par value. The bonds had a 7.5% call premium, with 5 years of call protection. Today ATT 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. Explain why the investor should or should not be happy that ATT called them.

Answer 1

1+0.075 x 1000

= 1075

If bonds are called back there would be 75 dollars more compared to fv

We calculate the yield to maturity using excel.

We use this formula to calculate this

YTc is = RATE(7, 11%x1000-1000x1000)x1.075

= 11.749%

Now this investor should be happy they were called by the ATT because the return they got back is more than what they were hoping to get at the time of purchase. YTc is higher and there is 75 dollars more fv