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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

YIELD TO CALL Seven years ago the Templeton Company 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 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. Explain why the investor should or should not be happy that Templeton called them.

Summary Introduction

To identify: Yield to call (YTC).

Yield to Call:

It refers to the rate of interest earned till the bonds are being called, but it is before maturity of the bond.

Explanation

Given,

Coupon rate is 11%.

Par value of bond is $1,000.

Maturity is after 20 years.

Call premium 7.5%.

Calculated values (working note),

Call price is $1,075.

Yield to call (YTC) can be calculated through value of bond.

Formula to calculate present value of bond,

Bond'svalue=t=1NINT(1+rd)t+Callprice(1+rd)N

Where,

  • INT is the interest rate
  • N is the number of year for maturity.
  • Rd is the rate of discount

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