Five years ago, Zapada International issued $50 million of 10 percent, 25-year debentures at a price of $990 per bond to the public. The call price was originally $1,100 per bond the first year after issuance, and this price declined by $10 each subsequent year. Zapada is now "calling" the bonds in order to refund them at a lower interest rate.

a. Ignoring taxes, what is a bondholder's return on investment for the 5 years? (Assume that interest is paid once a year and that the investor owns one bond.)

b. If the bondholder can now invest $1,000 in a 20-year security of equivalent risk that provides 8 percent interest, what is the overall return over the 25-year holding period? How does this compare with the return on the Zapada bonds had they not been called? (Assume again that interest is paid once a year. Both rates of return can be approximated using the present value tables at the end of the book.)