《CorporateFinance》Chap008.pptVIP

* Please note that you have to have the analysis tool pack add-ins installed to access the PRICE and YIELD functions. If you do not have these installed on your computer, you can use the PV and the RATE functions to compute price and yield as well. Click on the TVM tab to find these calculations. * * You should be willing to accept a lower stated yield on municipals because you do not have to pay taxes on the interest received. You will want to make sure the students understand why you are willing to accept a lower rate of interest. It may be helpful to take the example and illustrate the indifference point using dollars instead of just percentages. The discount you are willing to accept depends on your tax bracket. Consider a taxable bond with a yield of 8% and a tax-exempt municipal bond with a yield of 6% Suppose you own one $1000 bond in each, and both bonds are selling at par. You receive $80 per year from the corporate and $60 per year from the municipal. How much do you have after taxes if you are in the 40% tax bracket? Corporate: 80 – 80(.4) = 48; Municipal = 60 * * * It is a good exercise to ask students which bonds will have the highest yield-to-maturity (lowest price) all else equal. Debt rated C by Moody’s is typically in default. * * Coupon rate = 8% Matures in November 2025 Bid price is 132 and 23/32 percent of par value. If you want to sell $100,000 par value T-bonds, the dealer is willing to pay 1.3271875(100,000) = $132,718.75 Ask price is 132 and 24/32 percent of par value. If you want to buy $100,000 par value T-bonds, the dealer is willing to sell them for 1.3275(100,000) = $132,750.00 The difference between the bid and ask prices is called the bid-ask spread, and it is how the dealer makes money. The price changed by -12/32 percent or $375 for a $100,000 worth of T-bonds The yield is 5.14% * Assuming that the November maturity is November 15, then the coupon dates would be November 15 and May 15. Therefore, July 15 would be 16 + 30 + 15