Dewey Cheetham and Howe Accounting firm is considering the purchase of $1,000 Ne

Question

Dewey Cheetham and Howe Accounting firm is considering the purchase of $1,000 New Haven Muncipal Bond. The stated coupon rate is 5%, paid quarterly. The bond will matuure in 22 years. The YTM for similar bonds is 4%.

A) Should the market price of the bond be? B) What is the effective rate? C) What should be the market price be if the coupon were paid annually? D) If the current market price of the bond is $1080 find the YTM with the original coupon E) What should the market price of the bond be if the YTM were 7% annually? F) What is the yield bond is callable in 10 years at 12% m with the original coupon?

Explanation / Answer

market price =c*(1-(1/1+i)^n))/i+M/(1+i)^n

c=bond value *coupenrate =1000*.04=40

M=1000, i=4% n=4(quarterly)

market price =40*(1-(1/1.04^4))+1000/(1.04^4)

market price=5.82+862

market price =$871

2. effective rate=i=(1+(r/m))^m-1

effective rate =(1+(.04/4))^4-1

effective rate= 1.04053-1=.04060 or4.06%

3.paid annualy

coupen rate= 4% quarterly = 4*4=16%

coupen rate=160*(1-(1/1.16^1))+1000/(1.16^1)

coupen rate =22.08+862.06

coupen rate =$884.14

4. YTM using current market price$1080 is 0.87%

ytm =c+(f-p)/n/(f+p)/n

f= face value 1000, p= present value=1080 n= mautrity years =22 c=16%(annualy)

ytm = .16+(1000-1080)22/(1000+1080)/22

ytm =.87%

5.msrket pricr at YTM 7%

ytm =(face value/bond price)^1/n -1

.07 =1000/bond price^1-1

bond price =1000/1.07=$934.75

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