A 2.70 percent coupon municipal bond has 11 years left to maturity and has a pri

Question

A 2.70 percent coupon municipal bond has 11 years left to maturity and has a price quote of 95.55. 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.)

A 2.70 percent coupon municipal bond has 11 years left to maturity and has a price quote of 95.55. 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.)

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Current Yield = Annual Coupon Amount/Current Price*100 = (5000*2.70%)/(5000*95.55%)*100 = 2.83%

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Part B:

YTM = Rate(Nper,PMT,PV,FV) = Rate(11,135,-4777.5,5000) = 3.19%

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Part C:

Taxable Equivalent Yield = YTM*(1-Tax Rate) = 3.19%*(1 -.35) = 2.07%

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Part D:

Call Price = Par Value + 1 Year Coupon Payment = 5000 + 135 = 5135

Yield to Call = Rate(Nper,PMT,PV,FV) = Rate(5,135,-4777.5,5135) = 4.20%

Thanks.

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