Detailed work please Consider the following municipal bond quotes: Issue Coupon

Question

Detailed work please

Consider the following municipal bond quotes: Issue Coupon Maturity Price Yield Nebraska Public Power District 5.00 2-1-2028 9757g 5.20 (a) Compute the total amount that you paid for the purchase of S40,000 par value of this municipal bond on April 17, 2015? Assume 30-day month and 360-day year in your accned interest computation. (b) For an investor whose average and marginal tax rates are 28% and 33%, respectively, should s/he invest in the municipal bond in part (a) OR a corporate bond that is currently priced to yield 7.35%? Justify your choice quanritath?4v!

Explanation / Answer

A) Assume bond par value $ 100

No of bond= $40000/100= 400

Current price of bond=$ 97.625

Total amount that you paid for bond= 400*$ 97.625=$ 39050

Accured Interest till maturity = $39050*5.2%*12.768 year= $ 25926.70

b) if yield rate 7.35 % then accured interest

                                               =$ 39050*7.35%*12.768= $ 36646.39

                                          Option 1 at 5.20%                                    Option 2 at 7.35%

Accured Interest         $ 25926.70                                           $ 36646.39

Less tax @ 28 % & 33%            7259.47    12093.30   

Interest after tax                          $ 18667.23                                             $ 24553.09

Option II is better i.e investment in corporate bond since earning after tax is more than option 1 in municipal bond,

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