Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 64

Five years ago, GSI, an oil services company headquartered in Texas, issued $10 million worth of 12% 30-year bonds with the dividend payable quarterly. The bonds have a call date of this year if GSI decides to take advantage of it. The interest rate in the marketplace decreased enough that the company is considering calling the bonds since the coupon rate is relatively high. If the company buys the bonds back now for $11 million, determine the rate of return that the company will make (a) per quarter and (b) per year (nominal). (Hint: The "call" option means the following: By spending $11 million now, the company will not have to make the quarterly bond dividend payments or pay the face value of the bonds when they come due 25 years from now.)