Problem 7-37 Yields of a Bond (LG7-6) A 2.90 percent coupon municipal bond has 1

Question

Problem 7-37 Yields of a Bond (LG7-6) A 2.90 percent coupon municipal bond has 13 years left to maturity and has a price quote of 96.55. The bond can be called in four years. The call premium is one year of coupon payments. (Assume interest payments are semiannual and a par value of $5,000.) Compute the bond's current yield. (Round your answer to 2 decimal places.) Current yield Compute the yield to maturity. (Round your answer to 2 decimal places.) Yield to maturity Compute the taxable equivalent yield (for an investor in the 35 percent marginal tax bracket). (Round your answer to 2 decimal places.) Equivalent taxable yield Compute the yield to call. (Round your answer to 2 decimal places.) Yield to call

Explanation / Answer

Current Yield = Annual Coupon / Price = 2.9 / 96.55 = 3.00%

YTM can be calculated using I/Y function

N = 13, PMT = 2.9, PV = -96.55, FV = 100 => Compute I/Y = 3.23%

Effective taxable yield = Nominal Yield / (1 - tax rate) = 3.23% / (1 - 35%) = 4.97%

YTC can be calculated using I/Y function

N = 4, PMT = 2.9, PV = -96.55, FV = 102.9 => Compute I/Y = 4.54%

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