economics You have just purchased a municipal bond with a 10,000 par value for 9
ID: 1189055 • Letter: E
Question
economics 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 7 years, selling the bond immediately after you receive the interest payment. If your desired nominal yield is 9.5% 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 plusminus 5.Explanation / Answer
Annual coupon payment = $10,000 x 6.6% = $660
Total coupon received in 7 years = $660 x 7 = $4,620
So, minimum selling price = Purchase price x [1 + (0.095 / 2)]2
= $9,500 x (1.0475)2 = $9,500 x 1.09726
= $10,424
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