Taussig Corp.\'s bonds currently sell for $1,225. They have a 6.50% annual coupo

Question

Taussig Corp.'s bonds currently sell for $1,225. They have a 6.50% annual coupon rate with interest paid annually, $1,000 par value, and 15 year maturity, but they can be called in 7 years at $1,065.00. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn on these bonds?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Nper = 7 (indicates the period over which interest payments are made)

PMT = 1000*6.50% = 65 (indicates the amount of interest payment)

PV = -1225 (indicates the present value)

FV = 1065 (indicates the future/face value)

Rate = ? (indicates the rate of interest)

Rate of Return = Rate(Nper,PMT,PV,FV) = Rate(7,65,-1225,1065) = 3.63%

Answer is 3.63%

Thanks.

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