Question

Five years ago REG Inc. sold $200,000,000 worth of bonds with ten years until maturity. The bonds were sold at par, and carry an annual coupon of 8%. INA Corp. has just sold $180,000,000 worth of bonds to investors, also at par. INA bonds have five years until maturity and carry a coupon rate of 9% with coupons paid semi-annually. Neither the REG nor the INA bonds have any complex features (they are not callable, they are not convertible etc.), their terms (covenants etc.) are the same, and they recently received identical ratings from the major bond rating agencies.

What is the EAR on REG bonds today?

Answer 1

first caclulate the current price of REG bonds

FV = 1000, PMT = 80, N = 5, rate = 9% (since the INA bonds are at par and pay a coupon of 9%)

use PV function in Excel

price of REG bonds = 961.10

Cash flows	Year
(1,000.00)	0
80.00	1
80.00	2
80.00	3
80.00	4
1,041.10	5

Use IRR function in Excel

EAR = 7.33%