ch 15

They already come with answers, but you need to come up with your additional/complementary explanations on why the answer is correct.

1. You purchase a $10,000 short-term, 90-day U.S. Treasury bill for $9,814. What are the discount yield, the simple annual yield, and the compound annual yield?

2. An investor is in the 20 percent income tax bracket and can earn 5.9 percent on a corporate bond. What is the after-tax comparable yield on a municipal bond?

3. If an investor can earn 4 percent on a tax-free bond, what rate on a corporate bond is necessary to earn the same after-tax return if the individual is in the 25 percent income tax bracket?

4. What is the compound rate earned on a $1,000 zero coupon bond that costs $675 and matures in ten years?

Answer!!

1. The discount yield: (($10,000 2 $9,814)/$10,000) 3 360/90 5 7.4% The simple annual yield: (($10,000 2 $9,814)/$9,814) 3 365/90 5 7.7% The compound annual yield: ($10,000/$9,814)90/365 2 1 5 7.9% PV 5 29814; FV 5 10000; N 5 90/365 5 .2466; PMT 5 0; I 5 ? 5 7.9

2. 5.9% 3 (1 2 0.2) 5 4.72%

3. 4.0%/(1 2 0.25) 5 5.33%

4. Using the future value of a dollar interest table: $675(1 1 i)10 5 $1,000 IF = 1.481; i 5 4% PV 5 2675; FV 5 1000; N 5 10; PMT 5 0; I 5 ? 5 4.0