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8.30     Rachette Corp. issued 20-year bonds five years ago. These bonds, which pay semiannual coupons, have...

8.30     Rachette Corp. issued 20-year bonds five years ago. These bonds, which pay semiannual coupons, have a coupon rate of 9.735 percent and a yield to maturity of 7.95 percent.

a.   Compute the bond’s current price.

b.   If the bonds can be called after five more years at a premium of 13.5 percent over par value, what is the investor’s realized yield?

c.   If you bought the bond today, what is your expected rate of return? Explain.

Solutions

Expert Solution

a)

b)

c)

Expected rate of return is YTM 7.95%, as YTM<YTC bonds will not be called and investors expect less rate of return.

jeff jeffy answered 1 year ago
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