What is your investor's real rate of return for holding the XYZ Light Corporation's 20-year bond with the following features:
- Coupon rate 5%, paid semi-annually
- Rating A-
- Maturity date December 1, 2016
- CPI 2%
- Par value $1,000
- Purchase price 90
- Call date January 1, 2019
- Call price 101 3/8.
EXPLANATION: once you decide to ignore the credit rating, the par value, the call date, and the call price, you can start solving the question. Take the $50 in annual income divided by the $900 purchase price, which is 5.5%. Then, reduce that by the 2% rate of inflation (CPI) and choose 3.5%. Typical Series 65 question--like a bully, it seems scary at first. Then you learn how to deal with it, and, eventually, it ceases to be a problem.