AYTM = 72.50 + (1000 – 1042)/12 = 6.7%
(1000 + 2(1042))/3
Builtrite bonds have the following: 6 3/4% coupon, 18 years until maturity,
$1000 par and are currently selling at $963. If you purchase this bond, what
would be your AYTM?
AYTM = 67.50 + (1000 – 963)/18 = 7.1%
(1000 + 2(963)0/3
2. Builtrite bonds have the following: 6 3/4% coupon, 18 years until maturity,
$1000 par and are currently selling at $988. If you want to make an 6% return,
what would you be willing to pay for the bond?
BV = 67.50(D-46%,18 = 10.828) + 1000 (D-36%,18 = .350) = $1081
Builtrite bonds have the following: 7 1/4% coupon, 12 years until maturity,
$1000 par and are currently selling at $952. If you want to make an 6% return,
what would you be willing to pay for the bond?
BV = 72.50(D-46%,12 = 8.384) + 1000(D-36%,12 = .497) = $1105
3. Builtrite sold 10 year, $1000 par value, zero coupon bonds yielding 4%. What
did they sell for?
BV = 1000(D_#4%,10 = .676) = $676
Builtrite sold 15 year, $1000 par value, zero coupon bonds yielding 5%. What
did they sell for?
BV = 1000(D-35%,15 = .481) = $481
4. The City of Tempe issued municipal bonds that pay a 2.4% coupon based on a
$1000 par value. For an investor in the 28% tax bracket, what is the tax equivalent
yield of the City of Tempe bonds?
TEY = 2.4/(1 - .28) = 3.33%
The City of Tempe issued municipal bonds that pay a 3.1% coupon based on a $1000
par value. For an investor in the 32% tax bracket, what is the tax equivalent yield of
the City of Tempe bonds?
TEY = 3.1/(1 - .32) = 4.56%
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QUIZ 3 SOLUTIONS FOR BOND PROBLEMS
1. Builtrite bonds have the following: 7 1/4% coupon, 12 years until maturity,
$1000 par and are currently selling at $1042. If you purchase this bond, what would
be your AYTM?
