A newly issued 10-year maturity, 4% coupon bond making annual coupon payments is
ID: 2634995 • Letter: A
Question
A newly issued 10-year maturity, 4% coupon bond making annual coupon payments is sold to the public at a price of $860. The bond will not be sold at the end of the year. The bond is treated as an original-issue discount bond. a. Calculate the constant yield price. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Constant yield price $ 11629 b. What will be an investors taxable income from the bond over the coming year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Taxable income $Explanation / Answer
Compute the price of the bond after one year:
The future value is $1,000, coupon rate is 4%, number of years are 9 left for maturity and the yield is computed using the excel formula:
Annual coupon payment = Face value X Coupon rate
= $1,000 X 4% = $40
Use the excel formula to find the yield:
Yield = (Nper, PMT, PV, FV)
= (10, -40, 860, -1000)
= 5.89%
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Use the excel formula to find the present value after one year:
PV = (Rate, Nper, PMT, FV)
= (5.89%, 9, -40, -1000)
= $870.83
Therefore, the taxable income after one year would be $870.83 or $871
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