A bondholder purchased an 8 percent coupon, $1,000 par three-year bond at a 7 percent yield. Interest rates then immediately fell to 6 percent and his bond was called at a price of $1,040. He reinvested his money and earned 6 percent on the $1,040 for three years. a) Did the call help or hurt the bondholder? b) What was his three-year rate of return on his original investment?

A bondholder purchased an 8 percent coupon, $1,000 par three-year bond at a 7 percent yield. Interest rates then immediately fell to 6 percent and his bond was called at a price of $1,040. He reinvested his money and earned 6 percent on the $1,040 for three years. a) Did the call help or hurt the bondholder? b) What was his three-year rate of return on his original investment?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 17P

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