A 4.20 percent coupon municipal bond has 12 years left to maturity and has a pri

Question

A 4.20 percent coupon municipal bond has 12 years left to maturity and has a price quote of 103.90. The bond can be called in eight years. The call premium is one year of coupon payments. (Assume interest payments are semiannual and a par value of $5,000.)

A 4.20 percent coupon municipal bond has 12 years left to maturity and has a price quote of 103.90. The bond can be called in eight years. The call premium is one year of coupon payments. (Assume interest payments are semiannual and a par value of $5,000.)

Explanation / Answer

Semiannual Payment = $5,000*4.20%/2= $105 103.90*$5,000 = $105/(1+r/2) + $105/(1+r/2)^2 + $105/(1+r/2)^3.... $5105/(1+r/2)^24 bond’s current yield, r = 3.79% taxable equivalent yield= 3.79%/(1-.3) = 5.41% Bond can be called in 8 years 103.90*$5,000 = $105/(1+r/2) + $105/(1+r/2)^2 + $105/(1+r/2)^3.... $5105/(1+r/2)^16 yield to call, r=3.632%

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