A newly issued 10-year maturity, 4% coupon bond making annual coupon payments is

Question

A newly issued 10-year maturity, 4% coupon bond making annual coupon payments is sold to the public at a price of $780. The bond will not be sold at the end of the year. The bond is treated as an original-issue discount bond. Calculate the constant yield price. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Constant yield price What will be an investor's 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

a. Interest paid per year on the bond is 4% of $ 1,000 (Assumed to be the face value) = $ 40. Adjusted Cost in the first year is $ 1,040, and the yield on this will be 7.15% (YTM factor) = 74.36 $ Thus, the constant yield price will be $ 74.36 - $ 40 = $ 34.36. b. The investor's taxable income from the bond over the coming year will be 4% of $ 1,000 or $ 40.

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