Question

7. Apple issued bond with a coupon rate of 5.67% and pays coupons annually. The bond matures in 21 years and the yield to maturity on similar bonds is 4.25%. What is the price of the bond?  
8. A bon dthat sells at par pays a semi-annual coupon of 91.17 and has 18 years to maturity. What is the bond's yield to maturity? Answer as a percent.
9. Investors with very high tax rates should always prefer corporate bonds due to taxation.

True

False

Answer 1

Q7:

Price of the bond is the present value of its cashflows discounted at YTM.

coupon per year= 5.67% of 1000 =56.7 ( here since par value not given 1000 is taken, if par value is 100, coupon will be 5.67)

Cashflows can be shown as below

Bond (Annual payment)
Years	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21
Price
Coupon payment		56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7
Par value																						1000
Total cashflows		56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	56.7	1056.7
NPV/Price	1,194.71

From the excel using npv formula, Price= 1194.71 @ 1000 par value or 119.471% of par value

Q8:

Lets assume a par value of 1000; the bond is selling at its par value. The cashflows can be shown as below. We need to find the IRR of the cashflows to find its YTM.

Bond (Annual payment)
Years	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26	27	28	29	30	31	32	33	34	35	36
Price	1000
Coupon payment		91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17
Par value																																					1000
Total cashflows	-1000	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	91.17	1091.17
IRR	9.117%

The YTM= 2*IRR =2*9.117%=18.234% ( since it is given that coupon payments are semi annual)

Q9:

False: Investors with high tax bracket will be preferring Municipal bonds due to its tax benefits.