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

Question

Dewey Cheetham & Howe Accounting firm is considering the purchase of a $1,000 New Haven Municipal Bond. The stated coupon rate is 6%, paid semi-annually (twice a year). The bond will mature in 20 years. The YTM for similar bonds is 3.5%. 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 semi-annual coupon, What should the market price of the bond be if YTM were 5% 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 semi-annualcoupon?

Explanation / Answer

b- nEffective interest rate per period, i = ( 1 + ( r / m ) )m - 1 = (1+ (6/2)^2 - 1 = 6.03%

answer to a value of the bond answer no c answer no e year dividend present value @1.75% present value year dividend present value @1.75% present value year dividend present value @1.75% present value 1 30 0.98280098 29.48403 1 60 0.970873786 58.25243 1 30 0.97561 29.26829 2 30 0.96589777 28.97693 2 60 0.942595909 56.55575 2 30 0.951814 28.55443 3 30 0.94928528 28.47856 3 60 0.915141659 54.9085 3 30 0.928599 27.85798 4 30 0.93295851 27.98876 4 60 0.888487048 53.30922 4 30 0.905951 27.17852 5 30 0.91691254 27.50738 5 60 0.862608784 51.75653 5 30 0.883854 26.51563 6 30 0.90114254 27.03428 6 60 0.837484257 50.24906 6 30 0.862297 25.86891 7 30 0.88564378 26.56931 7 60 0.813091511 48.78549 7 30 0.841265 25.23796 8 30 0.87041157 26.11235 8 60 0.789409234 47.36455 8 30 0.820747 24.6224 9 30 0.85544135 25.66324 9 60 0.766416732 45.985 9 30 0.800728 24.02185 10 30 0.8407286 25.22186 10 60 0.744093915 44.64563 10 30 0.781198 23.43595 11 30 0.82626889 24.78807 11 60 0.722421277 43.34528 11 30 0.762145 22.86434 12 30 0.81205788 24.36174 12 60 0.70137988 42.08279 12 30 0.743556 22.30668 13 30 0.79809128 23.94274 13 60 0.68095134 40.85708 13 30 0.72542 21.76261 14 30 0.7843649 23.53095 14 60 0.661117806 39.66707 14 30 0.707727 21.23182 15 30 0.77087459 23.12624 15 60 0.641861947 38.51172 15 30 0.690466 20.71397 16 30 0.75761631 22.72849 16 60 0.623166939 37.39002 16 30 0.673625 20.20875 17 30 0.74458605 22.33758 17 60 0.605016446 36.30099 17 30 0.657195 19.71585 18 30 0.7317799 21.9534 18 60 0.587394608 35.24368 18 30 0.641166 19.23498 19 30 0.71919401 21.57582 19 60 0.570286027 34.21716 19 30 0.625528 18.76583 20 30 0.70682458 21.20474 20 60 0.553675754 33.22055 20 30 0.610271 18.30813 21 30 0.69466789 20.84004 21 30 0.595386 17.86159 22 30 0.68272028 20.48161 value of bond 892.6485 22 30 0.580865 17.42594 23 30 0.67097817 20.12934 23 30 0.566697 17.00092 24 30 0.659438 19.78314 answer to d 24 30 0.552875 16.58626 25 30 0.64809632 19.44289 25 30 0.539391 16.18172 26 30 0.6369497 19.10849 YTM interest + (redemption value - market value)/ years to maturity / (redemption value - market value)/2 60 + (1000-1080)/20 / (1000+1080)/2 5.38% 26 30 0.526235 15.78704 27 30 0.62599479 18.77984 27 30 0.5134 15.40199 28 30 0.61522829 18.45685 28 30 0.500878 15.02633 29 30 0.60464697 18.13941 29 30 0.488661 14.65984 30 30 0.59424764 17.82743 30 30 0.476743 14.30228 31 30 0.58402716 17.52081 31 30 0.465115 13.95344 32 30 0.57398247 17.21947 32 30 0.453771 13.61312 33 30 0.56411053 16.92332 33 30 0.442703 13.28109 34 30 0.55440839 16.63225 34 30 0.431905 12.95716 35 30 0.54487311 16.34619 35 30 0.421371 12.64113 36 30 0.53550183 16.06505 36 30 0.411094 12.33281 37 30 0.52629172 15.78875 37 30 0.401067 12.03201 38 30 0.51724002 15.5172 38 30 0.391285 11.73855 39 30 0.508344 15.25032 39 30 0.381741 11.45224 40 1030 0.49960098 514.589 40 1030 0.372431 383.6035 value of bond 1357.428 value of bond 1125.514 effective rate #NUM! answer to f any investor buys the bond at premium when coupon rate on bond is greater than the market rate of interest or at discount when vice versa answer to g YTC interest + (redemption value - market value)/ years to CALL / (redemption value - market value)/2 60 + (1000-1120)/10 /   (1000+1120)/2 4.52%

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