Dewey Cheetham and Howe Accounting firm is considering the purchase of $1,000 Ne

Question

Dewey Cheetham and Howe Accounting firm is considering the purchase of $1,000 New Haven Muncipal Bond. The stated coupon rate is 5%, paid quarterly. The bond will matuure in 22 years. The YTM for similar bonds is 4%.

A) Should the market price of the bond be? B) What is the effective rate? C) What should be the market price be if the coupon were paid annually? D) If the current market price of the bond is $1080 find the YTM with the original coupon E) What should the market price of the bond be if the YTM were 7% annually? F) What is the yield bond is callable in 10 years at 12% m with the original coupon?

Explanation / Answer

Market price If paid annually:

Market price of the Bond Step1: Determine the interest payments interest rate is 5/4 = 1.25% Interest = 1000*1.25% = 12.5 Step 2 Determine the present value of an annuity factor for the interest payments. term = 22*4=88 int = 4/4=1 $988.77 Present value of 1000 for n=88 int=1 416.6 Market value of bond = 416.6+988.77 1405.37

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