A 3.30 percent coupon municipal bond has 11 years left to maturity and has a pri
ID: 2784406 • Letter: A
Question
A 3.30 percent coupon municipal bond has 11 years left to maturity and has a price quote of 97.15. 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.)
Compute the bond’s current yield. (Round your answer to 2 decimal places.)
A 3.30 percent coupon municipal bond has 11 years left to maturity and has a price quote of 97.15. 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
current price of the bond=1000*97.15%=971.50
bond’s current yield=(1000*3.30%)/971.50=3.40%
use financial calculator for yield to maturity
PV=-971.50
FV=1000
N=11*2=22 semi annual
PMT=1000*3.30%/2=16.50
Click CPT
Click 1/Y=1.8082%
yield to maturity=1.8082%*2=3.61640% or 3.62% is answer
taxable equivalent yield=3.62%/(1-36%)=5.66%, please try 5.65% also as it might be slightly lower due to rounding off
for yield to call , use financial calculator
PV=-971.50
FV=1033 is call price (1000+1000*3.3%=1033)
N=4*2=8 semi annual
PMT=1000*3.30%/2=16.50
Click CPT
Click 1/Y=2.4250%
yield to call=2.4250%*2=4.85%
the above are the answers
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