Six years ago, Bradford Community Hospital issued 20-year municipal bonds with a 7 percent annual coupon rate. The bonds were called today for a $70 call premium-that is, bondholders received $1,070 for each bond. What is the realized rate of return for those investors who bought the bonds for $1,000 when they were issued

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Business

Andy

4 June, 09:10

Six years ago, Bradford Community Hospital issued 20-year municipal bonds with a 7 percent annual coupon rate. The bonds were called today for a $70 call premium-that is, bondholders received $1,070 for each bond. What is the realized rate of return for those investors who bought the bonds for $1,000 when they were issued

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Janelle Morton · Answer 1

Answer: the realized rate of return = $105

Explanation:

To calculate the the realized rate of return, first calculate the amount after six years with the premium which is an addition to the principal amount and then calculate the amount when the bond was bought for $1000.

amount at premium of $70 (that is principal now is $1070) using compound interest formula: fv = p (1+r) ∧n where p = principal=1070,

fv=amount required, r=rate of interest=7%, n=number of years = 6, and

∧=raise to power.

fv=1070 (1.07) ∧6=1605

amount after investors bought it for $1000=1000 (1.07) ∧6 = 1500

realized rate of return = 1605-1500 = $105