Five years ago, GSI, an oil services company, issued $10 million worth of 12%, 30-year bonds with interest payable quarterly. The interest rate in the marketplace decreased enough that the company is considering calling the bonds. If the company buys the bonds back now for $11 million,
(a) what rate of return per quarter will the company make on the $11 million expenditure and
(b) what nominal rate of return per year will it make on the $11 million investment? Hint: By spending $11 million now, the company will not have to make the quarterly bond interest payments or pay the face value of the bonds when they come due 25 years from now.
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