A 4.40 percent coupon municipal bond has 16 years left to maturity and has a pri
ID: 2749069 • Letter: A
Question
A 4.40 percent coupon municipal bond has 16 years left to maturity and has a price quote of 105.50. The bond can be called in eight years. The call premium is one year of coupon payments. (Assume interest payments are semiannual and a par value of $5,000.)
Compute the taxable equivalent yield (for an investor in the 35 percent marginal tax bracket). (Round your answer to 2 decimal places.)
A 4.40 percent coupon municipal bond has 16 years left to maturity and has a price quote of 105.50. The bond can be called in eight years. The call premium is one year of coupon payments. (Assume interest payments are semiannual and a par value of $5,000.)
Explanation / Answer
a)
Current yield = Annual Coupon/Price of Bond
Current yield = 4.40%*5000/ (105.50%*5000)
Current yield = 4.17%
b)
YTM = rate(nper,pmt,pv,fv)
Nper (indicates the period) = 16
PV (indicates the price) = 5000*105.50% = 5275
PMT (indicate the annual payment) = 5000*4.4% = 220
FV (indicates the face value) = 5000
Rate (indicates YTM) = ?
YTM = rate(16,220,-5275,5000)
YTM = 3.93%
c)
Equivalent taxable yield = YTM*(1-tax rate)
Equivalent taxable yield = 3.93%*(1-35%)
Equivalent taxable yield = 2.55%
d)
YTC = rate(nper,pmt,pv,fv)
Nper (indicates the period) = 8
PV (indicates the price) = 5000*105.50% = 5275
PMT (indicate the annual payment) = 5000*4.4% = 220
FV (indicates the call value) = 5000 + 220 = 5220
Rate (indicates YTC) = ?
YTC = rate(8,220,-5275,5220)
YTC = 4.06%
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