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 $

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

a.

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

                    K = 10   
860 =? [(4*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^10
                   k=1

YTM = 5.8924%

Price after 1 year:

                    K = 9   
BOND PRICE=? [(4*1000/100)/(1 + 5.8924/100)^k]     +   1000/(1 + 5.8924/100)^10
                   k=1

= 870.68

b. Taxable income will only be on coupon interest as bond is not being sold = 4%1000 =$40

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