What is the rate of return for the investor who purchased the bonds?

Question

Company X issued 30 year bonds with 10% annual coupon rate at their par value of $1000 in 2010. The bond has a 7% call premium. Today Company X called the bonds. I am confused as to how to calculate the rate of return and where to even start the process.

Answer 1

This seems like a standard IRR problem.

Assuming they were bought at their par value of $1,000 22 years ago, you would have 12 years of 10% coupons ($100/yr) and a redemption of $1070 (the face value plus the 7% call premium). If you calculate the IRR of that cash flow stream you'd get an IRR (annualized rate of return) of 10.32%.

There may be slight differences depending on the actual timing of the call (i.e. was is called in the middle of a period, so you get partial interest, etc.) but that's the general idea.