An investor owns $10,000 par value of a municipal bond with the following rates:
4.0% coupon rate
5.0% current yield
4.5% yield to maturity (YTM)
6.5% tax-equivalent yield
What amount of interest should the investor expect to receive each year?
The annual interest on a bond is calculated based on the coupon rate and the bond's par value.
Coupon rate = 4.0%.
Annual interest = $10,000 (par value) 4.0% = $400.
A is correct because the coupon rate determines the annual interest.
B, C, and D are incorrect because they reflect incorrect calculations. The current yield, YTM, and tax-equivalent yield do not affect the bond's fixed coupon payments.
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