Compute realized rate of return for investor

Assignment Help Financial Management

Reference no: EM132053144

Nine years ago the Templeton Company issued 17-year bonds with an 12% annual coupon rate at their $1,000 par value. The bonds had an 8% call premium, with 5 years of call protection. Today Templeton called the bonds.

A. 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. %

B. Why the investor should or should not be happy that Templeton called them.

I. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates.

II. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.

III. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns.

IV. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk.

V. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.

Reference no: EM132053144

Questions Cloud

Treasury desk should take in order to hedge against risk : Explain the risk faced by your bank in the spot market and determine the futures position that the Treasury desk should take in order to hedge against this risk

The largest monthly payment you can afford : The largest monthly payment you can afford is $450. The loan will have a 12% APR based on end-of-month payments.

What would its present value be : If interest rates doubled to 14%, what would its present value be?

How many months will it be before he pays off the card : If Simon makes the minimum monthly payment and makes no other charges, how many months will it be before he pays off the card?

Compute realized rate of return for investor : Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called.

What was charge for depreciation and amortization : It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?

When it should abandon oil field : An oil producer is trying to decide if and when it should abandon an oil field.

What is debt-to-capital ratio : The firm's total capital is $135 million and it finances with only debt and common equity. What is its debt-to-capital ratio?

What is its total assets turnover : What is its total assets turnover? What is its equity multiplier?

User Account

All Pages