Determine the rate of return that the company will make

Reference no: EM13549247

Five years ago, GSI, an oil services company headquartered in Texas, issued $10 million worth of 12% 30-year bond with the dividend payable quarterly. The bonds have a call date of this year if GSI decides to take advantage of it. If the company buys the bonds back now for $11 million, determine the rate of return that the company will make

(a) per quarter and

(b) per year (nominal).

(hint: the "call" option means the following: By spending $11 million now, the company will not have to make the quarterly bond dividend payments or pay the face value of the bonds when they come due 25 years from now.)

Reference no: EM13549247

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