FIN 3501 FIN3501 Week 9 Individual Work 1 Bonds and Debt Instruments (Everest University)

FIN 3501 Week 9 Individual Work 1 Bonds and Debt Instruments (Everest University)

Problems: 1, 2, 3, 5, and 6

1. If a six-month Treasury bill is purchased for $0.9675 on a dollar (i.e., $96,750 for a $100,000 bill), what is the discount yield, the annual rate of interest, and the compound rate? What will these yields be if the discount price falls to $0.94 on a dollar (i.e., $94,000 for a $100,000 bill)?

2. An investor is in the 28 percent income tax bracket and can earn 3.3 percent on a nontaxable bond. What is the comparable yield on a taxable bond? If this same investor can earn 5.9 percent on a taxable bond, what must be the yield on a nontaxable bond so that the after-tax yields are equal?

3. An investor in the 35 percent tax bracket may purchase a corporate bond that is rated double B and is traded on the New York Stock Exchange (the bond division). This bond yields 9.0 percent. The investor may also buy a double-B-rated municipal bond with a 5.85 percent yield. Why may the corporate bond be preferred? (Assume that the terms of the bonds are the same.)

5. You are in the 28 percent federal income tax bracket. A corporate bond offers you 6.8 percent while a tax-exempt bond with the same credit rating and term to maturity offers 4.1 percent. On the basis of taxation, which bond should be preferred? Explain.

6. A six-month $10,000 Treasury bill is selling for $9,844. What is the annual yield according to the discount method? Does this yield understate or overstate the true annual compound yield? Explain.