Question

Six years ago the Templeton Company issued 20-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 when they were issued and held them until they were called. Round your answer to two decimal places.

  %

Answer 1

Bond Face Value=   $1,000
Bond call value=face value+9% call premium=   $1,090
Coupon amount = face value * interest rate  
1000*15%=   $150
Time to call (n)=   6
Bond price of issue=   $1,000
  
Bond price formula = Coupon amount * (1 - (1/(1+i)^n)/i + call value/(1+i)^n  

Yield to call is i, that is the rate at which present value of bond coupon and Call Value of bond is equal to bond price of issue. Yield to call is the realized Return earned on bonds  

We will Calculate i by trial and Error method.

Assume I= 15%

Bond price = 150 * (1 - (1/(1+15%)^6)/15% + 1090/(1+15%)^6
1038.909484

Assume i=16%  
Bond price = 150 * (1 - (1/(1+16%)^6)/16% + 1090/(1+16%)^6  
=1,000  
  

At 16% rate, bond price is equal to $1000 issue price.
So realized rate of return is 16%  
  
  
Excel function = rate(number of years to call, Coupon amount, -Issue price, call value)  
rate(6,150,-1000,1090)  
=16%

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