A firm is considering the purchase of a $1,000 New Haven Municipal Bond. The cit

Question

A firm is considering the purchase of a $1,000 New Haven Municipal Bond. The city is raising funds for a much needed advertising campaign to promote its East Coast community. The stated coupon rate is 5%, paid quarterly. The bond will mature in 10 years. The YTM for similar bonds is 4%. What should the market price of the bond be? What is the effective rate? What should the market price be if the coupon were paid annually? What should the market price of the bond be if YTM were 7% annually? What is the Yield to Call if the bond is callable in 7 years at a 6% premium?

Explanation / Answer

Particular Year Amount PV@4% Coupon=1000*0.05/4 1 12.5 12.02 2 12.5 11.56 3 12.5 11.11 4 12.5 10.69 5 12.5 10.27 6 12.5 9.88 7 12.5 9.50 8 12.5 9.13 9 12.5 8.78 10 12.5 8.44 11 12.5 8.12 12 12.5 7.81 13 12.5 7.51 14 12.5 7.22 15 12.5 6.94 16 12.5 6.67 17 12.5 6.42 18 12.5 6.17 19 12.5 5.93 20 12.5 5.70 21 12.5 5.49 22 12.5 5.27 23 12.5 5.07 24 12.5 4.88 25 12.5 4.69 26 12.5 4.51 27 12.5 4.34 28 12.5 4.17 29 12.5 4.01 30 12.5 3.85 31 12.5 3.71 32 12.5 3.56 33 12.5 3.43 34 12.5 3.29 35 12.5 3.17 36 12.5 3.05 37 12.5 2.93 38 12.5 2.82 39 12.5 2.71 40 12.5 2.60 40 1000 208.29 Total 455.70 Effective Rate=(1000-455.70)/455.70=119.4% Particular Year Amount PV@4% PV@7% 1 50 48.077 46.73 2 50 46.228 43.67 3 50 44.450 40.81 4 50 42.740 38.14 5 50 41.096 35.65 6 50 39.516 33.32 7 50 37.996 31.14 8 50 36.535 29.10 9 50 35.129 27.20 10 50 33.778 25.42 10 1000 675.564 508.35 Total 1081.109 859.528 Effective Rate=(1081.109-1000)/1000=8.1% Market Price at the yield of 7% will be 859.52 Particular Year Amount PV@4% 1 50 48.077 2 50 46.228 3 50 44.450 4 50 42.740 5 50 41.096 6 50 39.516 7 50 37.996 7 1060 805.513 Price if callable in 7years 1105.616 Yiled = 11.05%

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