A $5,000 face value municipal bond matures in 10 years and is priced at $4,850. The coupon rate is 4.75% with interest paid semiannually. What is the yield to maturity on the bond?

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) on a bond is the internal rate of return (IRR) for an investor if the bond is held until maturity, assuming that all coupon and principal payments are made as expected. The YTM can be calculated using a financial calculator or spreadsheet software by inputting the present value (the price paid for the bond, which is -$4,850), the future value (the face value of the bond, which is $5,000), the payment (the semiannual coupon payment, which is 4.75% of $5,000 divided by 2, or $118.75), and the number of periods (20, since the bond matures in 10 years and pays interest semiannually). Solving for the interest rate per period and then doubling it (since it's semiannual) gives the annual YTM, which is approximately 5.14%.

A $5,000 Face Value Municipal Bond Matures in 10 Years