Calculate the dirty price of this transaction

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Reference no: EM133188048

Bonds

Question 1. On 10th July 2019 you purchase a $10,000T-note that matures on 31st December 2029 (settlement occurs one day after purchase, so you receive actual ownership of the bond on 11th July 2019). The coupon rate on the T-note is 2.125 percent and the current price quoted on the bond is 98.250 percent. The last coupon payment occurred on 30th June 2019 (11 days before settlement) and the next coupon payment will be paid on 31st December 2019 (173 days from settlement).

a. Calculate the accrued interest due to the seller from the buyer at settlement
b. Calculate the dirty price of this transaction

Question 2. Consider an investor who on 1st January 2019 purchases a TIPS bond with an original principal of $100,000, an 8% annual (or 4% semiannual) coupon rate, and 10 years maturity.

a. If the semiannual inflation rate during the first 6 months is 0.3%, calculate the inflation adjusted principal amount and determine the first coupon payment (paid on 30th June 2019).
b. Suppose that the semiannual inflation for the second six-month period is 1%. Calculate the inflation-adjusted principal at the end of the second six months (on 31 December 2019) and the coupon payment to the investor for the second six-month period.

Question 3. Consider an investor who on 1st January 2020 purchases a TIPS bond with an original principal of $100,000, an 4.5% annual (or 2.25% semi-annual) coupon rate and 5 years to maturity.

a. If the semi-annual inflation rate during the first 6 months is 0.25%, calculate the inflation adjusted principal amount and determine the first coupon payment (paid on 30th June 2020).
b. Suppose that the semiannual inflation for the second six-month period is 0.5%. Calculate the inflation-adjusted principal at the end of the second six months (on 31 December 2020) and the coupon payment to the investor for the second six-month period.

Question 4. You can invest in taxable bonds that are paying a yield of 9.50% or a municipal bond paying a yield of 7.75%. If your marginal tax rate is 21%, which security bond should you buy?

Question 5. A taxable bond you are considering as an investment currently pays a yield of 6.75%.

a. Calculate the after-tax yield if your marginal tax rate is 28%.
b. Calculate the after-tax yield if your marginal tax rate is 21%.

Question 6. What are capital markets, and how do bond markets fit into the definition of capital markets?

Question 7. What are the advantages and disadvantages of investing in TIPS bonds?

Question 8. What is the difference between term bonds and serial bonds?

Question 9. What is a convertible bond? Is a convertible bond more or less attractive to a bond holder than a non-convertible bond?

Question 10. Why would a municipal bond issuer want to purchase third-party insurance on the bond payments?

Reference no: EM133188048

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