A 1000 par value bond pays annual coupons of 80. The bond is re- deemable at...

 

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A 1000 par value bond pays annual coupons of 80. The bond is re- deemable at par in 30 years, but is callable anytime from the end of the 10th year at 1050. Based on her desired yield rate, an investor calculates the following potential purchase prices, P: Assuming the bond is called at the end of the 10th year, P = 957 Assuming the bond is held until maturity, P = 897 The investor buys the bond at the highest price that guarantees she will receive at least her desired yield rate regardless of when the bond is called. The investor holds the bond for 20 years, after which time the bond is called. Calculate the annual yield rate the investor earns. A 1000 par value bond pays annual coupons of 80. The bond is re- deemable at par in 30 years, but is callable anytime from the end of the 10th year at 1050. Based on her desired yield rate, an investor calculates the following potential purchase prices, P: Assuming the bond is called at the end of the 10th year, P = 957 Assuming the bond is held until maturity, P = 897 The investor buys the bond at the highest price that guarantees she will receive at least her desired yield rate regardless of when the bond is called. The investor holds the bond for 20 years, after which time the bond is called. Calculate the annual yield rate the investor earns.

Answer rating: 100% (QA)

SOLUTION To calculate the annual yield rate we need to first calculate the total amount of cash inflows and outflows over the 20year holding period For the first 10 years the bond pays annual coupons ... View the full answer