Recycler Battery Corporation (RBC)issued zero coupon bonds 5 years ago at a price of $214.50 per bond.RBC's zeros had a 20-year original maturity,with a $1,000 par value.The bonds were callable 10 years after the issue date at a price 7% over their accrued value on the call date.If the bonds sell for $240 in the market today,what annual rate of return should an investor who buys the bonds today expect to earn on them?
A)9.01%
B)9.48%
C)9.98%
D)10.48%
E)11.00%

Question

Quizplus · Accepted Answer

First, we need to calculate the accrued value of the bond if it were called today:

Accrued value = $214.50 * (1 + 0.05) ^ 5 = $285.01

Since the bonds are currently selling for $240, the yield to maturity (YTM) can be calculated using the following formula:

PV = FV / (1 + YTM) ^ n

where PV is the present value of the bond, FV is the face value of the bond, YTM is the yield to maturity, and n is the number of years to maturity.

Solving for YTM in this equation using a financial calculator, we get:

YTM = 9.98%

Therefore, an investor who buys the bonds today can expect to earn an annual rate of return of 9.98%.

Recycler Battery Corporation (RBC)issued Zero Coupon Bonds 5 Years Ago