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 $860. 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 S 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

Market Price=Discounted Rate of Coupons and the Face Value of the bond. Let the FV of the bond is 1000.

or 860=40/(1+R)+40/(1+R)^2+40/(1+R)^3+40/(1+R)^4+40/(1+R)^5+40/(1+R)^6+40/(1+R)^7+40/(1+R)^8+40/(1+R)^9+1040/(1+R)^10,

Solving the equation , we get R=5.9%

So,the yield price is 5.9%

Every year , the bond holder gets coupon of 40 which is taxable. End of the 10th year , the investor will get 1040(Face Value+Coupon) which is taxable.

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