Seven years ago the Templeton Company issued 16-year bonds with an 11% annual coupon rate at their $1,000 par value. The bonds had a 7.5% call premium, vith 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were ssued and held them until they were called. Round your answer two decimal places. % Why should or should not the investor be happy that Templeton called them? I. Investors should be happy. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns. II. Investors should be happy. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk. III. Investors should not be happy. 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. IV. Investors should be happy. 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. -Select- V
Seven years ago the Templeton Company issued 16-year bonds with an 11% annual coupon rate at their $1,000 par value. The bonds had a 7.5% call premium, vith 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were ssued and held them until they were called. Round your answer two decimal places. % Why should or should not the investor be happy that Templeton called them? I. Investors should be happy. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns. II. Investors should be happy. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk. III. Investors should not be happy. 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. IV. Investors should be happy. 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. -Select- V
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Seven years ago the Templeton Company issued 16-year bonds with an 11% annual coupon rate at their $1,000 par value. The bonds had a 7.5% call premium,
with 5 years of call protection. Today Templeton 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.
%
Why should or should not the investor be happy that Templeton called them?
I. Investors should be happy. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns.
II. Investors should be happy. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk.
III. Investors should not be happy. 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.
IV. Investors should be happy. 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.
-Şelect-
Expert Solution
Introduction
Yield to maturity (YTM) refers to the rate of return on a bond provided that the bond is held till the maturity date. Investors consider YTM before making investment decisions as it gives an estimation of the returns on investment. Additionally, YTM is used by investors for comparing the returns of various investment options and then select the best alternative.
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