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 $720

A newly issued 10-year maturity, 4% coupon bond making annual coupon payments is sold to the public at a price of $720. 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) Constant yield price = $793.13

b) Taxable Income = $59.13

explanation

The bond is issued at a price of $720.Therefore its yield to maturity is 8.2130%.[ n = 10, PV = -720, FV = 1,000; PMT =40]

Using the constant yield method we can compute that its price in one year (when maturity falls to 9 years) will be (at an unchanged yield) $739.13, representing an increase of $19.13

Total taxable income = $40+ $19.13 = $59.13

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