Assume that the Province of Gauteng sold tax-exempt, zero coupon bonds with a R1,000 maturity value 5 years ago.The bonds had a 25-year maturity when they were issued, and the interest rate built into the issue was 8 percent, compounded semi-annually.The bonds are now callable at a premium of 4 percent over the accrued value.What effective annual rate of return would an investor who bought the bonds when they were issued and who still owns them earn if they were called today?

Question

Quizplus · Accepted Answer

The effective annual rate of return is calculated based on the semi-annual compounding interest rate of 8% and the call premium. The bonds were issued with a 25-year maturity, but are called after 5 years. The effective annual rate of return is calculated using the formula for compound interest and adjusting for the call premium, resulting in approximately 9.01%.

Assume That the Province of Gauteng Sold Tax-Exempt, Zero Coupon