Finance 367 Exam 1 Na Name Use this bond for questions 1115

Finance 367 Exam 1 Na Name: Use this bond for questions 11-15: The municipal bond is tax-exempt with a maturity term of 5 years, coupon rate of 6% and a clean price of$992.08 on a S 1,000 face value. The bond pays interest semi-annually. 11 . Assume the marginal tax rate of 30%, the annual equivalent taxable yield on this bond is closest to which BEY below: a) b) 7.52% e) 8.84% d) 10.17% 6.19% 12. What is the accrued interest if the investor held this municipal bond for 45 days? a) 7.30 b) 7.40 7.50 d) None of the above 13. Assume the semi-annual reinvestment rate of 2%, the interest on interest of this bond is closest to? a) $27.35 b) $28.49 c) $29.63 d) $30.77 14. A manager purchases this bond and on the bond settlement date, the accrued interest is calculated to be $10. Absent of other costs (transaction etc), what is the amount of money that actually changes hands (this is the nrice?

Solution

Coupon Rate = 6 % per annum or 3 % per half-year, Face VAlue = $ 1000

Semi-Annual Coupon = 0.03 x 1000 = $ 30

A semi-annual reinvestment rate of 2 % implies that all interim cash flows of the bond (semi-annual coupon payments) are reinvested at this rate for the remaining tenure of the bond (post payment of the cash flow). In other words, the first coupon coming in at the end of 0.5 years is reinvested at 2 % per half-year for 9 half-years (4.5 years), the second coupon is reinvested at 2 % per half-year for 8 half-years(4 years) and so on.

Total Reinvestment Value = 30 x (1.02)^(9) + 30 x (1.02)^(8) + .............+ 30 = $ 328.49

Total Coupon Paid = 30 x 10 = $ 300

Reinvestment Income = 328.49 - 300 = $ 28.49

Hence, the correct option is (b).