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

Question

Dewey Cheetham & Howe Accounting firm is considering the purchase of a $1,000 New Haven Municipal Bond. The stated coupon rate is 6%, paidsemi-annually (twice a year). The bord mature in 20 years. The YTM for similar bonds is 3.5%. What should the market price of the bond be? What is the effective rate? What should the market price be if the coupon were paid annually? If the current market price of the bond is $1080, find the YTM with the original semi-annual coupon. What should the market price of the bond be if YTM were 5% annually? f) Explain why an investor would buy a bond at a premium or at a discount. What is the Yield to Call if the bond is callable in 10 years at a 12% premium with the original semi - annual coupon?

Explanation / Answer

a)

                    K =Nx2         
BOND PRICE= [(Semi-annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^(Nx2)
                   k=1

                    K= 20x2          
BOND PRICE= [(6*1000/(100*2))/(1 + 3.5/200)^k]     +   1000/(1 + 3.5/200)^20x2
                   k=1

=1357.43

b.

Effective annual rate = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100

=((1+6/200)^2-1)*100

=6.09%

c.

                    K = N          
BOND PRICE= [(Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1

                    K = 20   
BOND PRICE= [(6*1000/100)/(1 + 3.5/100)^k]     +   1000/(1 + 3.5/100)^20
                   k=1

=1355.31

d.

K =Nx2          
BOND PRICE= [(Semi-annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^(Nx2)
                   k=1

                    K= 20x2           
1080 = [(6*1000/(100*2))/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^20x2
                   k=1

YTM = 5.34%

Please ask remaining parts seperately

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.