A newly issued 10-year maturity, 5% coupon bond making annual coupon payments is

Question

A newly issued 10-year maturity, 5% coupon bond making annual coupon payments is sold to the public at a price of $870. 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.

From the data privided , we can calculate the YTM as 6.837 %. .

Hence discounting the yield , the constant yield price would be 879.48 .

b.

The bond is issued at a price of $870. Therefore, its yield to maturity is 6.837%. [n= 10; PV = 870; FV = 1,000; PMT = 50] Using the constant yield method, we can compute that its pricein one year (when maturity falls to 9 years) will be (at an unchanged yield) $879.48,representing an increase of $9.48. Total taxable income is: $50 + $9.48 = $59.48

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