# ch08 sol - calculated The after tax yield on the taxable...

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1 CHAPTER 8 BOND MARKETS ANSWERS TO END-OF-CHAPTER QUESTIONS 1. Calculate the gross profit that an underwriter would make if it sold \$10 million worth of bonds at par (face value) and paid the firm that sold the bonds 99.25% of par. The gross profit would be 0.75% of the \$10 million raised in the market or: 0.0075 (10,000,000) = \$75,000 . 2. If a bond dealer bought a \$100,000 municipal bond at 90% of par and sold it at 93% of par, how much money did the dealer make on the bid-ask spread? The spread of 3% of \$100,000 is \$3,000 . 3. If a corporate bond paid 9% interest, and you are in the 28% income tax bracket, what rate would you have to earn on a general obligation municipal bond of equivalent risk and maturity in order to be equally well off? Given that municipal bonds are often not easily marketable, would you want to earn a higher or lower rate than the rate you just

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Unformatted text preview: calculated? The after tax yield on the taxable corporate bond is 6.48% or [9%(1-0.28)] and is the comparable rate of a tax-free municipal bond. For any added risk on the muni-bond (e.g., lower marketability), the investor would pay less or require a higher rate of return (i.e., above 6.48%). 4. If a trust is established to securitize \$100 million in auto loans that paid 13% interest and the average rate paid on the tranches issued was 10%, whereas financial guarantees to protect against default on the loans cost 1.5%, how much money would the creator of the trust have available to pay for loan servicing and profits if the financial guarantee was purchased? With a revenue rate of 13% and expenses of 11.5% (10% rate plus 1.5% guarantee cost), the annual cash flows available for loan servicing and profits is (0.13 – 0.115) x \$100 million = \$1.5 million . 2...
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## This note was uploaded on 11/08/2011 for the course MAT/FIN 272 taught by Professor Burns during the Spring '11 term at Central Connecticut State University.

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ch08 sol - calculated The after tax yield on the taxable...

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