YIELD TO CALL Nine years ago the Templeton Company issued 28-year bonds with an
ID: 2781759 • Letter: Y
Question
YIELD TO CALL Nine years ago the Templeton Company issued 28-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. investor should vben called,interest rates must h a call remium aner reinvestment ec i lesthan 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. -Select-Explanation / Answer
a) The Investor has received the following returns over the 9 year period.
i) 12% per annum for 9 years on his investment of $1000 i.e. $ 1080
ii) the call premium of 8% i.e. $80
i) +ii) being $1,160 . This on his face value translates to a realised return of 116%, ( without adjusting for inflation)
b) The Investor would be not happy as (option v) Interest rates must have fallen sufficiently such that YTC is < than YTM. Interest receipts would have to be reinvested at lower rates of interest.
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