21. Problem 7.08 YIELD TO CALL Nine years ago the Tempeton Company issued 27-yea

Question

21. Problem 7.08 YIELD TO CALL Nine years ago the Tempeton Company issued 27-year bonds with an 11% annual coupon rate at their $1 Templeton called the bonds. ,000 par value. The bonds had an 9% call premium, with 5 years of call protection. Today rate of return for an investor who purchased the bonds when they were issued and held them until they were ated. Round your answer to tceemal paces . Why the investor should or should not be happy that Templeton called them 1. 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 tcheir interest recespts, they can now so at higher interest rates 11. Since the bonds have been called, incerest 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 s0 at lower interest rates. 111. Since the bonds have been calied, investors will receve a call premium and can declare a capital gain on their tax returns IV. Since the bonds have been cated, investors "ill no longer need te consider remestment 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 theirinterest receipts, they must do so at ower interest retes

Explanation / Answer

21)

Correct option is II

1 Call price (Here it is FV) $                                  1,090.00 2 Coupon rate 11.00% 3 Number of compounding periods per year 1 1*2/3 Interest per period (PMT) $                                      110.00 Bond price (PV) $                                -1,000.00 4 Number of years to call 9 5 = 4*3 Number of compounding periods till call (NPER) 9 Bond Yield to call RATE(NPER,PMT,PV,FV) Bond Yield to call 11.62%

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