determine the promised yield to maturity for Illinois’ outstanding issue of 6 percent coupon bonds.

Best Available Writers

The state of Illinois is facing a budget crisis due to the combined effects of the failure of the state legislature to cut spending and the migration of high-income taxpayers to nearby Indiana. Security analysts agree there is a 15 percent probability that Illinois will default on its outstanding debt during the next year, in which case bondholders will lose 80 percent of the $1000 principal value of their investment. The state’s outstanding debt consists of a single bond issue having one year to maturity, a 6 percent annual coupon rate, and a face value of $1000. The coupon payments on the bonds, which are exempt from Federal taxes, are paid annually (once per year), with the final coupon payment occurring at the end of the year. The annualized yield to maturity for risk-free US Government bonds having one year to maturity is 4.0 percent. The tax rate for the marginal investors who earn the same after-tax return from Illinois municipal bonds and US government bonds is 40 percent. Assuming that investors determine the prices of municipal bonds by discounting their expected payoffs using the discount rate for risk-free municipal bonds, determine the promised yield to maturity for Illinois’ outstanding issue of 6 percent coupon bonds. (15 points)

 

Best Available Writers

Looking for writer? — Hire assignment writer!


Get any topic done in as little as 6 hours

Ask your question

Save your time - order a paper!

Get your paper written from scratch within the tight deadline. Our service is a reliable solution to all your troubles. Place an order on any task and we will take care of it. You won’t have to worry about the quality and deadlines

Order Paper Now