Question

A 3.30 percent coupon municipal bond has 11 years left to maturity and has a price quote of 97.15. The bond can be called in four years. The call premium is one year of coupon payments. (Assume interest payments are semiannual and a par value of $5,000.) Compute the bond's current yield. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Current yield [ % Compute the yield to maturity. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Yield to maturity % Compute the taxable equivalent yield (for an investor in the 36 percent marginal tax bracket). (Do not round intermediate calculations. Round your answer to 2 decimal places.) Equivalent taxable yield % Compute the yield to call. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Yield to callſ

Answer 1

current yield = coupon rate*par value/current price

Current yield%=(3.3/100)*100/97.15

Current yield% = 3.4

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =11x2

97.15 =∑ [(3.3*100/200)/(1 + YTM/200)^k]     +   100/(1 + YTM/200)^11x2

k=1

YTM% = 3.62

Using Calculator: press buttons "2ND"+"FV" then assign

PV =-97.15

PMT = Par value * coupon %/coupons per year=100*3.3/(2*100)

N =11*2

FV =100

CPT I/Y

Interest rate = I/Y*2

Using Excel

=RATE(nper,pmt,pv,fv,type,guess)*no. of payments per year

=RATE(2*11,-3.3*100/(2*100),97.15,-100,,)*2

Municipal bond rate = Taxed bond rate * (1-Tax rate)

3.62 = Taxed bond rate * (1-0.36)

Taxed bond rate = 5.66

K = Time to callx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTC/2)^k]     +   Call Price/(1 + YTC/2)^Time to callx2

k=1

K =4x2

97.15 =∑ [(3.3*100/200)/(1 + YTC/200)^k]     +   103.3/(1 + YTC/200)^4x2

k=1

YTC% = 4.85

Using Calculator: press buttons "2ND"+"FV" then assign

PV =-97.15

PMT = Par value * coupon %/coupons per year=100*3.3/(2*100)

N =4*2

FV =103.3

CPT I/Y

Interest rate = I/Y*2

Using Excel

=RATE(nper,pmt,pv,fv,type,guess)*no. of payments per year

=RATE(2*4,-3.3*100/(2*100),97.15,-103.3,,)*2