Wald Inc.'s bonds currently sell for $1,120 and have a par value of $1,000. They pay an $85 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,050. What return would an investor most likely earn, if interest rates remain at current levels for the foreseeable future

Question

Talan Brandt

Business

22 October, 02:34

Wald Inc.'s bonds currently sell for $1,120 and have a par value of $1,000. They pay an $85 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,050. What return would an investor most likely earn, if interest rates remain at current levels for the foreseeable future

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Answers (1)

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Lorenzo Arroyo · Answer 1

A. 7.08%

B. 6.49%

C. 5.95%

D. 6.71%

E. 7.34%

The correct option is B, 6.49%

Explanation:

The return that the investor would earn is the yield to maturity of the bond which is calculated using rate formula in excel as shown thus:

=rate (nper, pmt,-pv, fv)

nper is the number of coupon payments the bond would receive which 5 since the bond can be called in 5 years

pmt is the annual coupon of $85

pv is the current market price of $1,120

fv is the call price in 5 years which is $1,050

=rate (5,85,-1120,1050) = 6.49%