A 1,0001,000 par value bond pays annual coupons of 8080. The bond is redeemable at par in 3030 years, but is callable any time from the end of the 10th10th year at 1,0501,050. Based on her desired yield rate, an investor calculates the following potential purchase prices (PP):

i) Assuming the bond is called at the end of the 10th10th year, PP = 957957

ii) Assuming the bond is held until maturity, PP = 897897

The investor buys the bond at the highest price that guarantees she will receive at least her desired yield rate regardless of when the bond is called. The investor holds the bond for twenty years, after which time the bond is called. Calculate the annual yield rate the investor earns.

Question A 1,000 par value bond pays annual coupons of 80. The bond is redeemable at par in 30 years, but is callable any time from the end of the 10th year at 1,050. Based on her desired yield rate, an investor calculates the following potential purchase prices (P): i) Assuming the bond is called at the end of the 10th year, P=957 ii) Assuming the bond is held until maturity, P=897 The investor buys the bond at the highest price that guarantees she will receive at least her desired yield rate regardless of when the bond is called. The investor holds the bond for twenty years, after which time the bond is called. Calculate the annual yield rate the investor earns. Possible Answers A 8.56 B 9.00 C 9.24 D 9.53 E 9.99 Question A 1,000 par value bond pays annual coupons of 80. The bond is redeemable at par in 30 years, but is callable any time from the end of the 10th year at 1,050. Based on her desired yield rate, an investor calculates the following potential purchase prices (P): i) Assuming the bond is called at the end of the 10th year, P=957 ii) Assuming the bond is held until maturity, P=897 The investor buys the bond at the highest price that guarantees she will receive at least her desired yield rate regardless of when the bond is called. The investor holds the bond for twenty years, after which time the bond is called. Calculate the annual yield rate the investor earns. Possible Answers A 8.56 B 9.00 C 9.24 D 9.53 E 9.99