You have just purchased a municipal bond with a $10,000 par value for $9,500. Yo

Question

You have just purchased a municipal bond with a $10,000 par value for $9,500. You purchased it immediately after the previous owner received a semiannual interest payment. The bond rate is 6.6% per year payable semiannually. You plan to hold the bond for 4 years, selling the bond immediately after you receive the interest payment. If your desired nominal yield is 5.5% per year compounded semiannually, what will be your minimum selling price for the bond?

Chapter 03, Problem 019 You have just purchased a municipal bond with a $10,000 par value for $9,500. You purchased it immediately after the previous owner received a semiannual interest payment. The bond rate is 6.6% per year payable semiannually. You plan to hold the bond for 4 years, selling the bond immediately after you receive the interest payment. If your desired nominal yield is 5.5% per year compounded semiannually, what will be your minimum selling price for the bond?$ Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is ±5. Click here to access the TVM Factor Table Calculator LINK TO TEXT

Explanation / Answer

Semi-annual (nominal) interest rate = 5.5%/2 = 2.75%

Number of compounding periods = 2 x 4 = 8

Semi-annual coupon payment = $10,000 x 6.6% x (6/12) = $330

Minimum selling price = Future worth after 4 years (8 compounding periods)

= 9,500 x F/P(2.75%, 8) + 330 x F/A(2.75%, 8)

= 9,500 x 1.24238** + 330 x 8.81384**

= 11,802.61 + 2,908.57

= 14,711 (rounded off)

**F/P(r%, N) = (1 + r)N

F/P(2.75%, 8) = (1.0275)8 = 1.24238

**F/A(r%, N) = [(1 + r)N - 1] / r

F/A(2.75%, 8) = [(1.0275)8 - 1] / 0.0275 = (1.24238 - 1) / 0.0275 = 0.24238 / 0.0275 = 8.81384

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