Yield to call Nine years ago the Singleton Company issued 16-year bonds with a 1

Question

Yield to call

Nine years ago the Singleton Company issued 16-year bonds with a 12% annual coupon rate at their $1,000 par value. The bonds had a 8% call premium, with 5 years of call protection. Today Singleton 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. Round your answer to two decimal places.

%

Explain why the investor should or should not be happy that Singleton called them.

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.

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.

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

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

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.

Explanation / Answer

Yield to call is a measure of the yield of a bond if you were to hold it until the call date.

The following assumptions are taken as per details given

The call price of bond is 8% call premium and par value is $1000 , so the call price is $1080 (1.08 x 1000)

The coupon rate is 12% on par value of bond , so the annual interest is $120 ( 1.12 x 1000)

The bond is called in 9 years

The total years of bond is 16 years

We have to calculate the interest rate , which is the realized real rate of return          

By using financial calculator , we can find i

When

N= 9

FV= 1080

PV= -1000

PMT = 120

The i is 12.53% , the realized real rate of return

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