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k0ka [10]
2 years ago
14

A municipal bond dealer buys 100M of 30 year non-callable 9% General Obligation bonds at par less 1 point. After holding the bon

ds in inventory for a week, the dealer reoffers the bonds on an 8.90 basis. The dealer's approximate profit or loss per bond on this transaction is:
Business
1 answer:
Sonbull [250]2 years ago
4 0

Answer:

gain = $26.24 per bond

Explanation:

trading bonds 100M, means $100,000 in bonds

the trader purchased the bonds at a discount, at 100 - 1.5 = 98.5%

the coupon rate is 9%, if the bonds are sold at 8.9%, then they will be sold at a premium.

to try to determine an approximate selling price = 9%/8.9% = 1.01123

profit per bond = sales price - purchase price =  ($1,000 x 1.01123) - ($1,000 x 0.985) = $1,011.24 - $985 = $26.24 per bond

total profit = $26.24 x 100 = $2,624

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