Question

Case 3: We find the data for a municipal bond issued by the Illinois state government. The bond’s “last trade date” (i.e., settlement date) is June 05, 2019. The bond’s “maturity date” is March 14, 2054. The bond’s “coupon rate” is fixed as “5.000%” per year. The bond’s coupon “payment frequency” is “semi-annual”. The bond’s “last trade yield” (i.e., yield-to-maturity) is quoted as “4.280%” per year.

(a) Based on the aforementioned settlement date, maturity date, coupon rate, coupon payment frequency and yield to maturity, what shall be the corresponding bond PRICE (relative to redemption par of 100)?

(b) Assumes that the Fed suddenly tightens its monetary policy now, causing interest rates to rise across financial markets. The aforementioned IL municipal bond’s yield-to-maturity also rises from 4.280% to “5.280%” per year. Will the bond PRICE go up or go down then? By how much?

(c) Assumes that the Fed suddenly loosens its monetary policy now, causing interest rates to rise across financial markets. The aforementioned IL municipal bond’s yield-to-maturity also drops from 4.280% to “3.280%” per year. Will the bond PRICE go up or go down then? By how much?

(d) Based on your answers to (b) and (c), is there a positive, negative or zero association between bond YIELD and its PRICE? (Hint: Positive association means “moving in the same direction”, negative association means “moving in the opposite directions”, while zero association means “one moves but the other does not get affected”.)

Need Excel formulas for all

Answer 1