A newly issued 10-year maturity, 5% coupon bond making annual coupon payments is

Question

A newly issued 10-year maturity, 5% coupon bond making annual coupon payments is sold to the public at a price of $770. The bond will not be sold at the end of the year. The bond is treated as an original-issue discount bond.

a. Calculate the constant yield price. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Constant yield price            $

b. 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

Face value of Bond = 1000

Price of Bond = 770

Coupon amount = 1000*5% = 50

Maturity of Bond (n) = 5 years

a)

Yield on Bond = [Interest + (Face value - Price)/n]/[(Face value + Price)/2]

= [50 + (1000-770)/10]/[(1000+770)/2]

= [50 + 23]/885

= 8.25%

b)

Investor's taxable income from the bond over the coming year = 1000*5% = 50

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