$6.95]
Add: aftertax coupon interest received
in second year:
+ 30.00
[$50
×
(1 – 0.40)]
Less: Capital gains tax on
(sales price – constant yield value):
– 23.99
[0.30
×
(798.82 – 718.84)]
Add: CF from first year's coupon (reinvested): + 27.92
[from above]
Total
$829.97
$705.46 (1 + r)
2
= $829.97
⇒
r = 0.0847 = 8.47%
14.
The
reported
bond price is: 100 2/32 percent of par = $1,000.625
However, 15 days have passed since the last semiannual coupon was paid, so:
accrued interest = $35
×
(15/182) = $2.885
The invoice price is the reported price plus accrued interest: $1,003.51
15.
If the yield to maturity is greater than the current yield, then the bond offers the
prospect of price appreciation as it approaches its maturity date.
Therefore, the
bond must be selling below par value.
16.
The coupon rate is less than 9%.
If coupon divided by price equals 9%, and price
is less than par, then price divided by par is less than 9%.
17.
Time
Inflation in
year just
ended
Par value
Coupon
payment
Principal
repayment
0
$1,000.00
1
2%
$1,020.00
$40.80
$ 0.00
2
3%
$1,050.60
$42.02
$ 0.00
3
1%
$1,061.11
$42.44
$1,061.11
146
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nominal
rate of return and
real
rate of return on the bond in each year are
computed as follows:
Nominal rate of return =
interest + price appreciation
initial price
Real rate of return =
1 + nominal return
1 + inflation
−
1
Second year
Third year
Nominal return
071196
.
0
020
,
1
$
60
.
30
$
02
.
42
$
=
+
050400
.
0
60
.
050
,
1
$
51
.
10
$
44
.
42
$
=
+
Real return
%
0
.
4
040
.
0
1
03
.
1
071196
.
1
=
=
−
%
0
.
4
040
.
0
1
01
.
1
050400
.
1
=
=
−
The real rate of return in each year is precisely the 4% real yield on the bond.
18.
The price schedule is as follows:
Year
Remaining
Maturity (T)
Constant yield value
$1,000/(1.08)
T
Imputed interest
(Increase in constant
yield value)
0 (now)
20 years
$214.55
1
19
$231.71
$17.16
2
18
$250.25
$18.54
19
1
$925.93
20
0
$1,000.00
$74.07
19.
The bond is issued at a price of $800.
Therefore, its yield to maturity is: 6.8245%
Therefore, using the constant yield method, we find that the price in one year (when
maturity falls to 9 years) will be (at an unchanged yield) $814.60, representing an
increase of $14.60.
Total taxable income is: $40.00 + $14.60 = $54.60
20.
a.
The bond sells for $1,124.72 based on the 3.5% yield to
maturity
.
[n = 60; i = 3.5; FV = 1000; PMT = 40]
Therefore, yield to
call
is 3.368% semiannually, 6.736% semiannually.
[n = 10 semiannual periods; PV = –1124.72; FV = 1100; PMT = 40]
b.
If the call price were $1,050, we would set FV = 1,050 and redo part (a) to
find that yield to call is 2.976% semiannually, 5.952% annually.
With a
lower call price, the yield to call is lower.
c.
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 Spring '13
 Ohk

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