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Question
A bondholder purchased a 9% coupon, $1,000 par 3-year bond at a 9% yield. Interest rates then immediately fell to 7% and his bond was called at a price of $1,040. He reinvested his money and earned 7% on the $1,040 for 3 years. Did the call help or hurt the bondholder? What was his 3-year rate of return on his original investment?
Answer
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