Question 1

A STRIPS has a yield to maturity of 4.0%, a par value of $20,000, and a time to maturity of 8 years. What is the price?

Accepted Answer

The answer of A STRIPS has a yield to maturity...

Question 2

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

Accepted Answer

The equivalent taxable yield is calculated by dividing the municipal bond yield by (1 - tax rate). So, 4.8% / (1 - 0.24) = 6.32%.

Question 3

You own a principal STRIPS that is based on a 4.5% 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 answer of You own a principal STRIPS that is...

Question 4

Jeff owns a taxable bond portfolio, which is yielding 8.76%. His aftertax yield is 6.57%. What is his marginal tax rate?

Accepted Answer

The answer of Jeff owns a taxable bond portfolio, which...

Question 5

You have a marginal tax rate of 35% and an average tax rate of 29%. Municipal bonds in your area are yielding 4.20%. What is your equivalent taxable yield?

Accepted Answer

The equivalent taxable yield is calculated using the formula: Tax-Exempt Yield / (1 - Marginal Tax Rate). So, 4.20% / (1 - 0.35) = 6.46%.

Question 6

Sonya has a marginal tax rate of 38%. A corporate bond is yielding 5.4% and a municipal bond is yielding 2.1%. Sonya should invest in the ________ bond because the critical marginal tax rate is ________ %.

Accepted Answer

The answer of Sonya has a marginal tax rate of...

Question 7

A $5,000 face value municipal bond matures in 12 years and is priced at $4,850. The coupon rate is 5.5% with interest paid semiannually. What is the yield to maturity on the bond?

Accepted Answer

The answer of A $5,000 face value municipal bond matures...

Question 8

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:
$$\begin{array} { c c c c } 
\text { Bidder } & \text { Price Bid } & \text { Qty } & \text { Bid } \
\mathbf { A } & \$ 9,700 & \$ 5 & \text { billion } \
\text { B } & \$ 9,650 & \$ 9 & \text { billion } \
\mathbf { C } & \$ 9,600 & \$ 4 & \text { billion } \
\text { D } & \$ 9,550 & \$ 9 & \text { billion }
\end{array}$$
What price will Bidder A pay per bond, assuming that bid is accepted?

Accepted Answer

Bidder A will pay the highest accepted price, which is the lowest price among the accepted bids. Since $7 billion is already allocated to noncompetitive bids, $18 billion remains. Bidders B and C will be fully accepted, totaling $13 billion, leaving $5 billion for Bidder A at $9,600.

Question 9

The Federal Reserve is offering Treasury bills with a par value of $40 billion for sale. They have received $18 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are:
$$\begin{array} { c c c c c } 
\text { Bidder } & \text { Frice Bid } &  \text { Oty } & \text { Bid } \
\text { A } & \$ 9,825 & \$  2 & \text { billion } \
\text { B } & \$ 9,815 & \$  6 & \text { billion } \
\text { C } & \$ 9,800 & \$ 14 & \text { billion } \
\text { D } & \$ 9,700 & \$ 20 & \text { billion }
\end{array}$$
How much money will the Federal Reserve raise from this offering?

Accepted Answer

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

Question 10

A Treasury bond has a 3.4% coupon, a current price of $1,011.88, and 9 years to maturity. What is the yield to maturity?

Accepted Answer

The yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate, and time to maturity. It is a complex calculation that requires solving for the interest rate in the bond price formula. Given the information, without performing the exact calculation, the correct answer is chosen based on the relationship between the bond's coupon rate, its price relative to the par value, and the time to maturity. Since the bond is trading at a slight premium (price is higher than the par value of $1,000) and has a relatively low coupon rate (3.4%), the YTM would be slightly less than the coupon rate because the investor is paying more upfront for the bond. Therefore, the closest and most reasonable choice given is 3.25%.

Question 11

You own a corporate bond, which is yielding 4.9%. What is your aftertax yield if your marginal tax rate is 28%?

Accepted Answer

To calculate aftertax yield, we need to find the aftertax portion of the yield.
Aftertax portion = Yield*(1-Marginal tax rate)
= 4.9%*(1-0.28)
= 3.53%
Therefore, the aftertax yield is 3.53%. Choice B is the correct answer.

Question 12

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:
$$\begin{array} { c c c c } 
\text { Bidder } & \text { Price Bid } & \text { Qty } & \text { Bid } \
\mathbf { A } & \$ 9,925 & \$ 2 & \text { billion } \
\text { B } & \$ 9,500 & \$ 5 & \text { billion } \
\mathbf { C } & \$ 9,875 & \$ 4 & \text { billion } \
\text { D } & \$ 9,750 & \$ 9 & \text { billion }
\end{array}$$
How much money will the Federal Reserve raise from this offering?

Accepted Answer

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

Question 13

Lester is considering a municipal bond yielding 5.5% and a corporate bond yielding 8.2%. His marginal tax rate is 28%. He should invest in the ________ bond because the critical marginal tax rate is ________ %.

Accepted Answer

The critical marginal tax rate is calculated as 1 - (municipal bond yield / corporate bond yield) = 1 - (5.5% / 8.2%) = 33%. Since Lester's marginal tax rate is 28%, which is less than 33%, he should invest in the corporate bond.

Question 14

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

Accepted Answer

The equivalent taxable yield is calculated by dividing the municipal bond yield by (1 - tax rate). For insured bonds: 4.4% / (1 - 0.28) = 6.11%. For uninsured bonds: 4.7% / (1 - 0.28) = 6.53%.

Question 15

Municipal bonds are yielding 3.6% currently. Alicia has a marginal tax rate of 35% and Yvonne has a marginal tax rate of 24 %. Alicia's equivalent taxable yield is ________% and Yvonne's is ________ %.

Accepted Answer

Alicia's equivalent taxable yield is calculated as 3.6% / (1 - 0.35) = 5.54%. Yvonne's equivalent taxable yield is 3.6% / (1 - 0.24) = 4.74%.

Question 16

Laura has an average tax rate of 15% and a marginal tax rate of 24%. What is her aftertax yield on a corporate bond which has a 4.5% yield?

Accepted Answer

The answer of Laura has an average tax rate of...

Question 17

A STRIPS that matures in 6 years is selling for $10,950. The par value is $15,000. What is the yield to maturity?

Accepted Answer

Using the formula for calculating yield to maturity for STRIPS, we have:

YTM = (Par value / Price)^(1/years to maturity) -1
YTM = (15,000 / 10,950)^(1/6) -1
YTM = 0.0531 or 5.31%
Therefore, the yield to maturity is 5.31%. The closest answer choice is C, so the answer is C.

Question 18

A STRIPS has a $10,000 par value and a market value of $8,590. The time to maturity is 7 years. What is the yield to maturity?

Accepted Answer

The answer of A STRIPS has a $10,000 par value...

Question 19

A STRIPS matures in 5 years, has a face value of $15,000, and has a yield to maturity of 4.4%. What is the price?

Accepted Answer

Using the formula P = F/(1+r)^n, where F is the face value, r is the yield to maturity, and n is the number of years to maturity, we get:

P = 15,000/(1+0.044)^5
P = $12,066.53

Therefore, the best choice is B.

Question 20

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

Accepted Answer

The answer of A corporate bond is yielding 7.31% and...

Quiz 18: Corporate and Government Bonds