XZYY, Inc. currently has an issue of bonds outstanding that will mature in 31 years. The bonds have a face value of $1,000 and a stated annual coupon rate of 8.0% with annual coupon payments. The bond is currently selling for $1,084. The bonds may be called in 3 years for 108.0% of the par value. What is your expected quoted annual rate of return if you buy the bonds and hold them until maturity?

7.31%

Explanation:

The question is pointing at the bond's yield to maturity.

The yield to maturity can be computed using the rate formula in excel as provided below:

=rate(nper,pmt,-pv,fv)

nper is the number of times the bond would pay annual coupons which is 31

pmt is the annual coupon payment i.e $1000*8.0%=$80.00

pv is the current price of the bond which is $1,084

fv is the face value of the bond which is $1,000

=rate(31,80,-1084,1000)=7.31%

The yield to maturity is 7.31%

That is the annual rate of return for an investor that holds the bond till maturity.

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