Structure of Municipal Bond - Bank Zero - Essay Example

The bond is issued for 10 years period. At the maturity of 10 years with a 10% annual coupon, the comparable bonds i.e. T-notes are offering a yield to maturity of 9.73%.

Yield to Maturity

The bond is a municipal bond in nature with 10 years of maturity and a 10% annual coupon. A comparable bond is a T-Note issued with the same 10 years of maturity and the same annual coupon rate of 10% with a Yield to Maturity of 9.73%. Since this municipal bond is about to be floated therefore its yield to maturity is the same as that of the coupon rate however when it will be floated, YTM may change in either direction.

Price range recommendations
The available data suggest that the bond which has the closest comparison with the proposed bond is T-Note which is currently offering a yield to maturity of 9.73% at the current price of $1016/bond. Guessing the favorable future interest rate scenario of declining interest rates, a price range from par to $1050 per bond would be a good price to offer by the bank.

Hold or Sell

Current analysis of the Yield curve suggests that the bank shall hold the bond and not sell them. A close analysis suggests that yield on the low-maturity Treasuries is somewhat constant however it increases as the time to maturity increase therefore Banks shall hold the bonds to sell them later on because yield curve analysis suggests that the interest rates in the future are going to decline therefore any bonds purchased at higher coupon rates will be offering good price to the bank to sell therefore my recommendations would be to hold the bond. Read More