Question

#2

The market price of a 11.00-year STRIPS is $343.00 The yield to maturity is ____%.

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Answer format: Percentage Round to: -2 decimal places (Example: 0%, % sign required. Will accept decimal format rounded to 0 decimal places (ex: 0))

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#3

A tax-exempt municipal bond has a yield to maturity of 5.17%. An investor, who has a marginal tax rate of 34.00%, would prefer and an otherwise identical taxable corporate bond if it had a yield to maturity of more than ____%.

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Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

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#4

The market price of a semi-annual pay bond is $975.28. It has 19.00 years to maturity and a coupon rate of 7.00%. Par value is $1,000. What is the yield to maturity?

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Answer format: Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434))

Answer 1

2.Strips are bond that are sold at a discount to their face value

Thus,Face value of given strip is $1000

YTM of strips=[(Face Value/Market Price)^1/n]-1

=[($1000/$343)^1/11-]1

=[(2.9155)^0.0909]-1

=0.1022

=10.22%

3.Taxable corporate bond must have after tax Yield of 5.17% or more

thus yield before tax must be;

=5.17%/(1-.34)

=5.17%/.66

=7.83%

Thus,.Taxable corporate bond must have YTM of 7.83% or more

4.YTM=[Interest+(Face Value-Purchase Value/life)]/(Face Value+Purchase Value)/2

=[$70+($1000-975.28)/19]/($1000+$975.28)/2

=$71.30/$987.64

=.0722

=7.22%