Four years ago, Valero issued $5 million worth of debenture bonds having a bond interest rate of 10% per year, payable semiannually. Market interest rates dropped and the company called the bonds (i.e., paid them off in advance) at a 10% premium on the face value. What semiannual rate of return did an investor make who purchased one $5000 bond 4 years ago and held it until it was called 4 years later?
What will be an ideal response?
i* = 5000(0.10)/2
= $250 per six months
0 = -5000 + 250(P/A,i*,8) + 5,500(P/F,i*,8)
Solve for i* by trial and error or spreadsheet
i* = 6.0% per six months (spreadsheet)
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