Final answer:
To calculate the yield on the bond, subtract the purchase price of the bond from the total amount received and divide it by the purchase price. In this case, the yield is 12%. The bond's coupon rate of 8% does not change, but the yield can be different due to changes in interest rates.
Step-by-step explanation:
To calculate the yield on the bond, you need to consider the interest payments and any capital gains. In this case, the investor buys an 8% municipal bond on a 10% basis and does not accrete annually. The investor will receive the $1,000 face value of the bond and $80 for the last year's interest payment. To calculate the yield, you subtract the purchase price of the bond from the total amount received and divide it by the purchase price. In this case, the yield is ($1,080 - $964) / $964, which equals 12%.
It is important to note that even though the bond's coupon rate is 8%, the yield can be different due to factors such as changes in interest rates. When interest rates rise, bonds issued at lower rates will sell for less than face value, resulting in a higher yield. Conversely, when interest rates fall, bonds issued at higher rates may sell for more than face value, resulting in a lower yield.