Question

There are zero coupon bonds outstanding that have a YTM of 6.21 percent and mature in 15 years. The bonds have a par value of $10,000. If we assume semiannual compounding, what is the price of the bonds?

A municipal bond has a coupon rate of 5.23 percent and a YTM of 5.49 percent. If an investor has a marginal tax rate of 35 percent, what is the equivalent pretax yield on a taxable bond?

Answer 1

The price of these bonds is :

FV = $10,000

N = 30 Years ( 15 years * 2)

YTM = 6.21%/ 2

= 3.105

The price if these bonds is = ($3995.841)

The pre - tax equivalent yield will be ,

The yield on municipal bonds is tax free so 5.49% will not be adjusted for any taxes.

5.49 % = Pre tax yield * (1 - 0.35)

So the Pre- tax yield on taxable bond which will make an investor indifferent between a municipal bond and a taxable bond is,

Pre tax yield is = 8.4462%.