# If the bond is called prior to maturity, Sofia has made arrangements to have the redemption amount accumulate in her i=5.5% savings account until the end of the eight years. What is her minimal yield for the eight-year period of the bond?

To yield, a six-year bond is purchased with coupons each year.

Sofia’s minimal yield for the eight-year period of the bond will depend on a few factors. Firstly, if she redeems the bond prior to maturity, she will receive all principal plus any remaining interest that has been earned up to that point—but not beyond it. Secondly, her yield is also affected by the rate at which her principal accumulates in her 5.5% savings account; since this rate is lower than what was originally intended with the bond (7%), she may end up losing out on some returns as money won’t be compounded until end of eight-year period.

You can use the following formula to calculate Sofia’s earnings from this arrangement

Yield = [(Principal + Interest) + Savings Account Accrual] / Principal

For example, let’s assume that Sofia redeems the bond after three years and has \$10,000 worth of principal plus an additional \$2,500 in accrued interest. The total redemption value would be \$12,500, which she would keep in her savings account at 5.5% for five years. We can then calculate the accrual amount assuming that there are no withdrawals from the account.

(1+0.055)^5 = 1.3385
\$12,500 * 1.3385 = 16795

Final, the total yield for an entire period can be calculated.

(16795 + 12500) / 12500 = 2.1436 <=> 214% return over 8 year period.<

Overall it’s clear that while this approach could potentially provide larger yields under certain circumstances due compounding effect of interest rates most likely outcome will still remain below original expectations due lower accrual rate associated with savings account when compared against what was offered initially through bond purchase itself