Dewey Cheetham & Howe Accounting firm is considering the purchase of a $ 1.000 N

Question

Dewey Cheetham & Howe Accounting firm is considering the purchase of a $ 1.000 New Haven Municipal Bond. The stated coupon rate is 5%, paid quarterly. The bond will mature in 22 years The YTM for similar bonds is 4%. What should the market price of the bond be? What is the effective rate? What should the market price be if the coupon were paid annually? If the current market price of the bond is $1080, find the YTM with the original coupon. What should the market price of the bond be if YTM were 7% annually? Explain why an investor would buy a bond at a premium or at a discount. What is the Yield to Call if the bond is callable in 10 years at a 12% premium with the original coupon?

Explanation / Answer

a)

K =Nx4
BOND PRICE= [(quarterly Coupon)/(1 + YTM/4)^k]     +   Par value/(1 + YTM/4)^(Nx4)
k=1

                    K= 22*4
BOND PRICE= [(5*1000/(100*4))/(1 + 4/400)^k]     +   1000/(1 + 4/400)^22*4
                   k=1

= $1145.85

b) effective rate =( ( 1 + stated rate/no. of compunding period)^no. of compunding period - 1)*100

   =( ( 1 + 5/4*100)^4- 1)*100 = 5.0945%

c)

  K = N          
BOND PRICE= [(Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1

                    K = 22   
BOND PRICE= [(5*1000/100)/(1 + 4/100)^k]     +   1000/(1 + 4/100)^10
                   k=1

= $1144.51

d)

K =Nx4
BOND PRICE= [(quarterly Coupon)/(1 + YTM/4)^k]     +   Par value/(1 + YTM/4)^(Nx4)
k=1

                    K= 22*4
1080 = [(5*1000/(100*4))/(1 + YTM/400)^k]     +   1000/(1 + YTM/400)^22*4
                   k=1

YTM = 4.429%

Please ask remaining parts seperately

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