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You invest in a three year bond with a face value of $100, a yield of 4% pa and a fixed coupon rate of 7% pa, paid semi-annually. So, there are two coupons per year, paid in arrears every six months. The corporate tax rate s 30%.

You invest in a three year bond with a face value of $100, a yield of 4% pa and a fixed coupon rate of 7% pa, paid semi-annually. So, there are two coupons per year, paid in arrears every six months. The corporate tax rate s 30%.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 4P
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You invest in a three year bond with a face value of $100, a yield of 4% pa and a fixed coupon rate of 7% pa, paid semi-annually. So, there are two coupons per year, paid in arrears every six months. The corporate tax rate is 30%. Which of the following statements is NOT correct? а. The current bond price is $108.4021 O b. The effective annual rate of the three year bond is 4.0400% If this company also has a 2 year bond on issue with a semi-annual yield of 2%, the forward rate over the third year (from t=2 to t=3), C. expressed as an effective annual rate, is 8.2220% d. The bond quotes indicate that the yield curve is normal (upward sloping). e. The extra interest tax shields generated for the issuing company due to the bond will be $2.10
Transcribed Image Text:You invest in a three year bond with a face value of $100, a yield of 4% pa and a fixed coupon rate of 7% pa, paid semi-annually. So, there are two coupons per year, paid in arrears every six months. The corporate tax rate is 30%. Which of the following statements is NOT correct? а. The current bond price is $108.4021 O b. The effective annual rate of the three year bond is 4.0400% If this company also has a 2 year bond on issue with a semi-annual yield of 2%, the forward rate over the third year (from t=2 to t=3), C. expressed as an effective annual rate, is 8.2220% d. The bond quotes indicate that the yield curve is normal (upward sloping). e. The extra interest tax shields generated for the issuing company due to the bond will be $2.10
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