A bondholder purchased a 9 percent coupon,$1,000 par three-year bond at a 9 percent yield. Interest rates then immediately fell to 7 percent and his bond was called at a price of $1,040. He reinvested his money and earned 7 percent on the $1,040 for three years. Did the call help or hurt the bondholder? What was his three-year rate of return on his original investment?

Question

Quizplus · Accepted Answer

The Answer of A bondholder purchased a 9 percent coupon,$1,000 par three-year bond at a 9 percent yield. Interest rates then immediately fell to 7 percent and his bond was called at a price of $1,040. He reinvested his money and earned 7 percent on the $1,040 for three years. Did the call help or hurt the bondholder? What was his three-year rate of return on his original investment?

A Bondholder Purchased a 9 Percent Coupon,$1,000 Par Three-Year Bond