A bondholder purchased an 10 percent coupon, $1,000 par three-year bond at a 7

percent yield. Interest rates then immediately fell to 6 percent and his bond was called

at a price of $1,080. He reinvested his money and earned 6 percent on the $1,080 for

three years.

1. Did the call help or hurt the bondholder?
2. What was his three-year rate of return on his original investment?