Question

set 1

1.The market price of a semi-annual pay bond is $963.48. It has 14.00 years to maturity and a coupon rate of 8.00%. Par value is $1,000. What is the yield to maturity?

2.A tax-exempt municipal bond with a coupon rate of 9.00% has a market price of 98.64% of par. The bond matures in 14.00 years and pays semi-annually. Assume an investor has a 28.00% marginal tax rate. The investor would prefer otherwise identical taxable bond if it's yield to maturity was more than _____%

3. A taxable bond with a coupon rate of 8.00% has a market price of 98.18% of par. The bond matures in 15.00 years ans pays semi-annually. Assume an investor has a 17.00% marginal tax rate. The investor would prefer otherwise identical tax-exempt bond if it's yield to maturity was more than _____%

Answer 1

face value Coupo payment 1000 (0.08*1000*1/2) 40 price 963.48 Number of periods 14*2 28 Use the financial calculator to calculate the YTM and multiply it by 2 to get the annual YTM YTM 4.225 annual YTM (4.225*2) 8.45%

2) Lets say the face value is 1000 Face value Coupon 1000 (0.09*1000*1/2) 45 price (0.9864*1000) 986.4 Number of periods= 14* 2 = 28 Use the financial calculator to calculate the YTM and multiply it by 2 to get the annual YTM YTM 4.587 Annual YTM (4.587*2) 9.17 Tax equivalent yield = Tax free bond yield/(1-tax rate) = 9.17/(1-0.28) 12.74 %

3) Lets say the face value is 1000 Face value Coupon 1000 (0.08*1000*1/2) 40 price (0.9818*1000) (0.9818*1000) 981.8 Number of periods= 15* 2 = 30 Use the financial calculator to calculate the YTM and multiply it by 2 to get the annual YTM YTM 4.107 Annual YTM (4.107*2) 8.21% Tax equivalent yield = Tax free bond yield/(1-tax rate) 8.21 = Tax free bond yield/(1-0.17) Tax free bond yield = 8.21*(1-0.17) 6.81 %