A municipal dealer buys $100,000 of 8% General Obligation bonds, M '42, at par. The dealer immediately reoffers the bonds to customers. Which TWO of the following quotes would be considered "fair and reasonable" under MSRB rules?
I 102
II 110
III 6.00 Net
IV 7.50 Net

A. I and III
B. I and IV
C. II and III
D. II and IV

Option B, I and IV

i.e 102 and 7.50 Net would be considered "fair and reasonable" under MSRB rules.

Explanation:

The dealer buys 6% bonds on an equal footing. When reselling bonds, the premium it receives must be equal and sensible. A price of 104 is equivalent to 4 percent higher than average. This is definitely fairer than just a price of 112, which translates to a mark-up of 12 percent. To receive an "approximate" price for an income-based long-term commitments, break the coupon by the purpose.

There would be an average price of 6.00 cents bid on a 5.75% basis ,

6.00/5.75 =  1.043478 x $1,000 par = $1,043.48.  

This is a rational improvement of roughly 4 percent over pair. A 6.00% note, then, would be sold at an average price at a yield of 4.00% of  

6.00/4.00 = 1.50 x $1,000 par = $1,500.  

This is a 50% improvement over the original, which is completely unreasonable.

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