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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?
Suggested Answer: A
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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.
37 comments · newest first
KR
Krystina
11 months ago
I thought it would be higher with those yields.
ON
Ona
11 months ago
The tax-equivalent yield is interesting, but it doesn't change the coupon amount.
RA
Raylene
12 months ago
Wait, are we sure about that? Seems low for a $10k bond.
NI
Nichelle
12 months ago
Totally agree, $400 is correct!
PE
Peggy
1 year ago
The coupon rate is 4.0%, so that's $400.
SH
Sheridan
1 year ago
Wait, does the tax-equivalent yield affect the interest amount? I’m a bit confused about how that plays into this question.
LE
Leila
1 year ago
I practiced a similar question, and I think the answer is definitely $400 since that's the standard calculation for coupon payments.
VA
Val
1 year ago
I'm not entirely sure, but I think the current yield might confuse things. I should focus on the coupon rate for the annual interest.
JO
Jody
1 year ago
I remember that the coupon payment is calculated by multiplying the coupon rate by the par value, so I think it should be $400.
LO
Lorrie
1 year ago
The tax-equivalent yield of 6.5% is throwing me off a bit. I'll need to remember how to use that to calculate the actual interest payment.
TO
Tom
1 year ago
Okay, I think I've got this. The coupon rate of 4.0% means the annual interest payment is $400. Now I just need to double-check that against the other yield information.
KE
Kerrie
1 year ago
Hmm, I'm a bit confused about the different yields listed. I'll need to think through how they relate to the annual interest payment.
RI
Rima
1 year ago
This looks like a straightforward interest calculation problem. I'll start by finding the annual interest payment based on the 4.0% coupon rate and the $10,000 par value.
CO
Corinne
2 years ago
Ah, the age-old question: how much can I milk out of my investments? I say we go with $650 and treat ourselves to a nice steak dinner!
ED
Eden
2 years ago
D) $650
YV
Yvonne
2 years ago
C) $500
LE
Leota
2 years ago
B) $450
JO
Joseph
2 years ago
A) $400
GE
Georgeanna
2 years ago
This is a tricky one, but I bet the answer is D. $650 just sounds right, you know? Who needs to do math when you can guess?
TO
Tomas
2 years ago
Wait, if the current yield is 5.0%, then the interest should be $500. Piece of cake!
LY
Lynsey
2 years ago
Wait, if the current yield is 5.0%, then the interest should be $500. Piece of cake!
AR
Aracelis
2 years ago
The correct answer is C) $500.
GA
Gaynell
2 years ago
D) $650
DE
Delmy
2 years ago
C) $500
LA
Lavonna
2 years ago
B) $450
YO
Yong
2 years ago
A) $400
BE
Bettye
2 years ago
I'm not sure, but I think the tax-equivalent yield is not relevant for this calculation
RE
Rene
2 years ago
Hmm, the tax-equivalent yield is 6.5%, which is higher than the YTM of 4.5%. Gotta be option B for $450.
VA
Valentine
2 years ago
Yes, the tax-equivalent yield being higher than the YTM indicates a higher expected return.
RE
Renay
2 years ago
I agree, option B for $450 seems correct.
KR
Kris
2 years ago
I agree with Cathern, the current yield is 5% so it should be $450
CA
Cathern
2 years ago
I think the answer is $450 (B)
TH
Thad
2 years ago
The coupon rate is clearly 4.0%, so the answer should be $400. Anything else is just nonsense.
SH
Shawn
2 years ago
Exactly, so the answer should be $400.
IS
Isabella
2 years ago
Those are different calculations, the question is asking for the amount of interest the investor should expect to receive each year.
ST
Stacey
2 years ago
But what about the current yield and yield to maturity?
JE
Jeanice
2 years ago
I think the answer is $400 because the coupon rate is 4.0%.