Question

1. A $1,000 Treasury note has 4.5 years left to maturity, a yield to maturity of 4.25 percent, and a coupon rate of 4.50 percent. What is the price of the bond? Group of answer choices $1,007.83 $1,010.14 $1,008.53 $1,011.96 $1,009.56

2. A corporate bond is yielding 7.31 percent and a municipal bond is yielding 4.75 percent. What is the critical marginal tax rate?

3. You own a principal STRIPS which is based on a 4.5 percent coupon Treasury bond that matures in 20 years. The STRIPS is priced at $22,868 and has a par value of $50,000. What is the yield to maturity on the STRIPS?

Answer 1

Answer to Question 1:

Face Value = $1,000

Annual Coupon Rate = 4.50%
Semiannual Coupon Rate = 2.25%
Semiannual Coupon = 2.25% * $1,000
Semiannual Coupon = $22.50

Time to Maturity = 4.50 years
Semianniual Period = 9

Annual YTM = 4.25%
Semiannual YTM = 2.125%

Current Price = $22.50 * PVIFA(2.125%, 9) + $1,000 * PVIF(2.125%, 9)
Current Price = $22.50 * (1 - (1/1.02125)^9) / 0.02125 + $1,000 / 1.02125^9
Current Price = $1,010.14