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5 September, 20:21

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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  1. 5 September, 21:22
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    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%
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