Question 1

A STRIPS has a $9,000 par value and a market value of $7,050.The time to maturity is 5 years.What is the yield to maturity?

Accepted Answer

The yield to maturity can be calculated as the discount rate that would make the present value of the STRIPS equal to its market value. Using a financial calculator, the yield to maturity is approximately 4.94%.

Question 2

A municipal bond is yielding 4.8 percent.Jeremy has a marginal tax rate of 24 percent.What is his equivalent taxable yield?

Accepted Answer

Equivalent taxable yield = .048/(1 - .24) = 6.32 percent

Question 3

A Treasury bond has a 3.4 percent coupon,a quoted price of 101: 06,and 9 years to maturity.What is the yield to maturity?

Accepted Answer

Price = $1,000 × 101 and 6/32^nds percent = $1,000 × 1.011875 = $1,011.875Payment = (.034 × $1,000)/2 = $17Using a financial calculator: YTM = 1.6234% × 2 = 3.25%

Question 4

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?

Accepted Answer

The STRIPS matures in 20 years because it is based on the T-bond principal.

Question 5

You have a marginal tax rate of 32 percent and an average tax rate of 28 percent.Municipal bonds in your area are yielding 4.25 percent.What is your equivalent taxable yield?

Accepted Answer

Equivalent taxable yield = .0425/(1 - .31) = 6.25 percent

Question 6

A Treasury bond matures in 13 years,has a 5.25 percent coupon,and a quoted price of 98: 01.What is the yield to maturity?

Accepted Answer

Price = $1,000 × 98 and 1/32^nds percent = $1,000 × .9803125 = $980.3125Payment = (.0525 × $1,000)/2 = $26.25Using a financial calculator:

Question 7

Sonya has a marginal tax rate of 36 percent.A corporate bond is yielding 7.4 percent and a municipal bond is yielding 3.6 percent.Sonya should invest in the _____ bond because the critical marginal tax rate is _____ percent.

Accepted Answer

Critical marginal tax rate = 1 - (.036/.074) = 51 percentSonya should invest in the corporate bond because her marginal tax rate is lower than the critical marginal rate.

Question 8

A Treasury note has 3.5 years left to maturity,a yield to maturity of 4.25 percent,and a coupon rate of 4.40 percent.What is the price of the bond?

Accepted Answer

Using the bond pricing formula, we can find the price of the bond:
Price = (Coupon payment / (1 + YTM)^1) + (Coupon payment / (1 + YTM)^2) + ... + (Coupon payment + Face value / (1 + YTM)^n)
where:
Coupon payment = ($44.00 coupon rate x $1,000 face value) / 2 = $22.00
YTM = 4.25%
n = 7 (since there are 3.5 years left to maturity, and coupon payments are made semi-annually, there are 7 coupon periods left)
Plugging in the values:
Price = ($22.00 / 1.02125^1) + ($22.00 / 1.02125^2) + ... + ($22.00 + $1,000 / 1.02125^7)
Price = $1,004.83
Therefore, the best choice is A, $1,004.83.

Question 9

You own a corporate bond which is yielding 8.2 percent.What is your after-tax yield if your marginal tax rate is 28 percent?

Accepted Answer

After-tax yield = .082 × (1 - .28) = 5.90 percent

Question 10

The Federal Reserve is offering Treasury bills with a par value of $30 billion for sale.They have received $11 billion of noncompetitive bids.The competitive bids for a $10,000 par value bond are:  How much money will the Federal Reserve raise from this offering?

Accepted Answer

The answer of The Federal Reserve is offering Treasury bills...

Question 11

Municipal bonds are yielding 4.4 percent if they are insured and 4.7 percent if they are uninsured.Your marginal tax rate is 28 percent.Your equivalent taxable yield on the insured bonds is _____ percent and on the uninsured bonds is _____ percent.

Accepted Answer

Equivalent taxable yield = .044/(1 - .28) = 6.11 percentEquivalent taxable yield = .047/(1 - .28) = 6.53 percent

Question 12

A corporate bond is yielding 6.8 percent and a municipal bond is yielding 4.75 percent.What is the critical marginal tax rate?

Accepted Answer

Critical marginal tax rate = 1 - (.0475/.068) = 30 percent

Question 13

The Federal Reserve is offering Treasury bills with a par value of $25 billion for sale.They have received $7 billion of noncompetitive bids.The competitive bids for a $10,000 par value bond are: (Qty in billions)  What price will Bidder A pay per bond,assuming that bid is accepted?

Accepted Answer

The answer of The Federal Reserve is offering Treasury bills...

Question 14

The Federal Reserve is offering Treasury bills with a par value of $10 billion for sale.They have received $3 billion of noncompetitive bids.The competitive bids for a $10,000 par value bond are: (Qty in billions)  How much money will the Federal Reserve raise from this offering?

Accepted Answer

The answer of The Federal Reserve is offering Treasury bills...

Question 15

A STRIPS matures in 6 years,has a face value of $17,000,and has a yield to maturity of 4.8 percent.What is the price?

Accepted Answer

The answer of A STRIPS matures in 6 years,has a...

Question 16

Municipal bonds are yielding 4.8 percent currently.Alicia has a marginal tax rate of 35 percent and Yvonne has a marginal tax rate of 22 percent.Alicia's equivalent taxable yield is _____ percent and Yvonne's is _____ percent.

Accepted Answer

Equivalent taxable yield = .048/(1 - .35) = 7.39 percentEquivalent taxable yield = .048/(1 - .22) = 6.15 percent

Question 17

A STRIPS that matures in 8 years is selling for $11,490.The par value is $15,000.What is the yield to maturity?

Accepted Answer

The correct answer is A because the yield to maturity is the annual rate of return an investor can expect to receive if they hold the bond until maturity. In this case, the yield to maturity is 3.36 percent.

Question 18

Jeff owns a taxable bond portfolio which is yielding 8.76 percent.His after-tax yield is 6.57 percent.What is his marginal tax rate?

Accepted Answer

.0657 = .0876 × (1 - x); x = 25 percent

Question 19

Laura has an average tax rate of 22 percent and a marginal tax rate of 28 percent.What is her after-tax yield on a corporate bond which has a 6.7 percent yield?

Accepted Answer

After-tax yield = .067 × (1 - .28) = 4.82 percent

Question 20

A STRIPS has a yield to maturity of 6.2 percent,a par value of $25,000,and a time to maturity of 10 years.What is the price?

Accepted Answer

11ea6d0e_c3cb_46ae_b3c7_dbdf4004e266_TB1223_00 11ea6d0e_c3cb_46af_b3c7_c1458ebc2657_TB1223_00

Quiz 18: Corporate and Government Bonds

A STRIPS has a $9,000 par value and a market value of $7,050.The time to maturity is 5 years.What is the yield to maturity?

A municipal bond is yielding 4.8 percent.Jeremy has a marginal tax rate of 24 percent.What is his equivalent taxable yield?

A Treasury bond has a 3.4 percent coupon,a quoted price of 101: 06,and 9 years to maturity.What is the yield to maturity?

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?

You have a marginal tax rate of 32 percent and an average tax rate of 28 percent.Municipal bonds in your area are yielding 4.25 percent.What is your equivalent taxable yield?

A Treasury bond matures in 13 years,has a 5.25 percent coupon,and a quoted price of 98: 01.What is the yield to maturity?

Sonya has a marginal tax rate of 36 percent.A corporate bond is yielding 7.4 percent and a municipal bond is yielding 3.6 percent.Sonya should invest in the _ bond because the critical marginal tax rate is _ percent.

A Treasury note has 3.5 years left to maturity,a yield to maturity of 4.25 percent,and a coupon rate of 4.40 percent.What is the price of the bond?

You own a corporate bond which is yielding 8.2 percent.What is your after-tax yield if your marginal tax rate is 28 percent?

The Federal Reserve is offering Treasury bills with a par value of $30 billion for sale.They have received $11 billion of noncompetitive bids.The competitive bids for a $10,000 par value bond are: How much money will the Federal Reserve raise from this offering?

Municipal bonds are yielding 4.4 percent if they are insured and 4.7 percent if they are uninsured.Your marginal tax rate is 28 percent.Your equivalent taxable yield on the insured bonds is _ percent and on the uninsured bonds is _ percent.

A corporate bond is yielding 6.8 percent and a municipal bond is yielding 4.75 percent.What is the critical marginal tax rate?

The Federal Reserve is offering Treasury bills with a par value of $25 billion for sale.They have received $7 billion of noncompetitive bids.The competitive bids for a $10,000 par value bond are: (Qty in billions) What price will Bidder A pay per bond,assuming that bid is accepted?

The Federal Reserve is offering Treasury bills with a par value of $10 billion for sale.They have received $3 billion of noncompetitive bids.The competitive bids for a $10,000 par value bond are: (Qty in billions) How much money will the Federal Reserve raise from this offering?

A STRIPS matures in 6 years,has a face value of $17,000,and has a yield to maturity of 4.8 percent.What is the price?

Municipal bonds are yielding 4.8 percent currently.Alicia has a marginal tax rate of 35 percent and Yvonne has a marginal tax rate of 22 percent.Alicia's equivalent taxable yield is _ percent and Yvonne's is _ percent.

A STRIPS that matures in 8 years is selling for $11,490.The par value is $15,000.What is the yield to maturity?

Jeff owns a taxable bond portfolio which is yielding 8.76 percent.His after-tax yield is 6.57 percent.What is his marginal tax rate?

Laura has an average tax rate of 22 percent and a marginal tax rate of 28 percent.What is her after-tax yield on a corporate bond which has a 6.7 percent yield?

A STRIPS has a yield to maturity of 6.2 percent,a par value of $25,000,and a time to maturity of 10 years.What is the price?