A 6.00 percent coupon municipal bond has 20 years left to maturity and has a pri
ID: 2666762 • Letter: A
Question
A 6.00 percent coupon municipal bond has 20 years left to maturity and has a price quote of 97.35. The bond can be called in 10 years. The call premium is one year of coupon payments.Required:
Compute the bond's current yield, yield to maturity, taxable equivalent yield (for an investor in the 40 percent marginal tax bracket), and yield to call. (Assume interest payments are paid semi annually and a par value of $5,000.) (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the "%" sign in your response.)
Current yield %
Yield to maturity %
Taxable equivalent yield %
Yield to call %
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Explanation / Answer
4) Yield to call is calculated as: Callable years = 10yrs Semi-annual callable periods = 10 * 2 = 20 periods Present value = $4867.5 Future price = $5000 + One-year interest payment (Call premium) = $5000 + $300 = $5300 Computing the yield using the excel sheet: Step1: Go to excel and click "insert" to insert the function. Step2: Select the "Rate" function as we are finding the Yield in this case. Step3: Enter the values as Nper = 20; PMT = -150; FV = -5300; PV = 4867.5 Step4: Click "OK" to get the desired value. The value comes to "3.4%" Semi-annual yield to call is 3.4% Annual yield to call is 6.8%