ezto mheducation.com Guns on Campus: Overview Assignment University of Missouri
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ezto mheducation.com Guns on Campus: Overview Assignment University of Missouri law pro. ocuments-HSP M value: 1.00 points Problem 7-37 Yields of a Bond (LG7-6) A 3.00 percent coupon municipal bond has 14 years left to maturity and has a price quote of 97.45. 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. (Round your answer to 2 decimal places.) Current yiekd Compute the yield to maturity. (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). (Round your answer to 2 decimal places) Equivalent taxable yield Compute the yieid to call. (Round your answer to 2 decimal places.) Yield to call 4.40 % Hints References eBook&Resources; Hnt#1Explanation / Answer
1. Current yield
Current yield = Interest / Current price x 100
Annual interest on bond = $100 x 3% = $3
Current price = $97.45
So, current yield = 3 / 97.45 x 100 = 3.08%
2. Yield to Maturity
Yield to maturity (ytm) = [Coupon payment + (Face Value - Price) / years to maturity)] / (Face value + Price)/2
Coupon payment = 100*3%*1/2 = $1.50 semiannually
Years to maturity = 14*2 = 28 (as interest is payable semiannually)
So, Ytm = [1.50 + (100 - 97.45) / 28 ] / (100 + 97.45)/2 = (1.50 + 0.09) / 98.725 = 0.0161 or 1.61%
Ytm on annual basis = 1.61 x 2 = 3.22%.
3. Equivalent taxable yield
Equivalent taxable yield = Return on tax free bonds / (1 - marginal tax rate) = 3.08% / (1 - 0.36) = 4.81%.
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